A hard money loan is a type of asset backed financing which is secured by pledging the value of the property as collateral. These loans have very high interest rates and are never issued by commercial banks or other depository institutions. Those with a bad credit rating or a poor credit score can use the help of such loans. However, the interest rates on such loans being high, the amount shelled out over and above the principal can be substantial.

• Hard money loans are similar to bridge loans; however the difference being that bridge loans are applicable where the property is in transition and cannot qualify for traditional financing. In the case of hard money loans it is usually found that either the property is going to be foreclosed or the borrower has a very poor credit rating and history. Therefore such loans are an indicator of troubled financial times as far as the mortgagor or the borrower is concerned. It is not surprising that such loans are termed as “last resort” in commercial markets.
• Usually the loan is such that the hard money lender is the first lien holder on the property. This means that this first lien holder will be the one to receive any funds from the proceeds of the foreclosure first. However some lenders may take the second position; in which case the loan is known as mezzanine loan or second lien. Usually in hard money loans, the loan to value ratio or LTV hovers somewhere from 60% to 70% of market value of property for such loans.
• These types of loans are very common in the United States and Canada but are accused of predatory lending practices. Even though this practice of hard money lending is considered predatory, the industry suffered major setbacks in the 1990’s and 1980’s when overestimation of the worth of properties led to huge losses. Since then a lower LTV ratio is maintained in order to mitigate the risk involved in the contract.
• In many cases the low LTV ratio makes it almost impossible for the borrower to make the lender the first lien holder. In order to make the hard money lender the first lien holder, the previous liens must be removed, that is, the previous lenders or mortgagees must be paid off. Usually this is not possible due to financial constraints and thus the option of cross collateralization can be employed. This method (also called blanket loan) uses the other assets or belongings of the borrower in order to solidify a contract. However, such loans are more common in the commercial market and rarely taken out by individuals.
• Hard money lending is famous in the United States as far as commercial markets for housing are concerned. The primary reason for this is that there are not many laws and regulations that impede the speed with which a borrower can secure finances. However on the other hand, lack of regulation has led to predatory lending practices. Therefore it is advisable to avoid such loans and look for alternatives since the price paid for being a victim of predatory lending can be horrendous.
• Some lenders in the commercial market require exorbitant up-front fees regardless of the amount or value of the assets being pledged. In such cases it is best to completely shun from such contracts since his is a quintessential sign of predatory lending. Although the hard money lending market is not completely regulated, it is possible to take legal action by contacting the office of the attorney general in case someone believes himself or herself to be a victim of predatory lending.

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