A hard money loan is an asset based loan collateralized by one or more assets (usually real estate). The interest rate is usually higher than a traditional/conventional loan, like one received from a bank. The reason for this is the lenders unique ability to close fast and in some cases credit is not a factor. Generally LTV (Loan to Value) is the determining factor in whether a hard money loan will be funded or not. Most lenders prefer to fund in a first lien position, which means that in case of a default they will be the first lender to receive honorarium.
Hard money lenders are similar to private money lenders in the fact that their funding capital is usually derived from a network of wealthy, private individuals, or companies. This pool allows them to be very liquid and enables them to fund a variety of investments.
Now that I understand, how do I use it?
Cash flow is the life blood of the real estate industry. If an investor wants to be in the position to take full advantage of real estate opportunities, he/she needs to be either cash rich, or have access to large amounts of capital. And have access to this capital in short notice. Being that most investors are not cash rich the second option is a great alternative.
Hard money can be used to prevent foreclosure, used as a construction bridge loan, or to fund projects that a traditional bank would not consider. Hard money lenders can close fast. Once all paper work is in place a deal can close in as fast as 24 hours. A traditional bank may take up to 6 months to fund. This short due diligence period enables the borrower to act fast on fleeting deals.