Simply put, a “hard money” loan is one made by an unconventional lender that specializes in short-term, high-cost loans, usually based not on the creditworthiness of the borrower, but on the value of the collateral securing the loan. Some hard money lenders are sizable concerns, but most are small firms or private investors, individuals with access to capital – their own or someone else’s –who are willing to make high-risk, high-profit loans.
Hard money loans are generally short-term and are expensive. Whereas a bank may charge annual interest of around 5%, a hard money lender might expect an interest rate of three times that, plus points (each “point” being equivalent to 1% of the loan principal), all usually prepaid out of the loan proceeds, making the loan proceeds paid at closing significantly less than the face amount of the loan.
For all that expense, though, expect a remarkably fast and red tape-free borrowing experience. Loans are usually underwritten quickly, sometimes without even a credit check, and with minimal paperwork. They are simply very, very expensive compared to bank financing.
Most hard money lenders do only commercial lending, i.e. those that are not for personal, family or household purposes. Limiting themselves to non-consumer lending puts hard money lenders beyond the reach of most state or federal regulation, including in Utah.
Hard money loans are also short-term. They are seldom intended to be permanent financing, but simply to get the borrower through a specific problem or period of time. For this reason, hard money loans are sometimes euphemistically called “bridge loans.”
Hard money loans can make sense, just make sure you understand the risks if you default. Losing your collateral to foreclosure because you couldn’t quite get from Here to There is when this type of financing can be really expensive.