Hard money loans usually have the following characteristics:

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• The loan is secured by real property 

• The funds are used for real-estate projects

• The duration is  short - a few months to couple of years

• Interest rates are higher than residential mortgages

• Issued by private investors or companies

• Loan terms are based mainly on the value of the collateral property , not on the creditworthiness of the borrower

• The borrower makes Interest-only monthly payments, and one balloon principal payment at maturity

 

Hard money loans may be sought by property flippers who plan to renovate and resell the real estate that is used as collateral for the financing—often within one year, if not sooner. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly—most hard money loans are for one to three years—and by some of the other advantages, they offer.

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The cost of a hard money loan to the borrower is typically higher compared to financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. Interest rates are typically higher than conventional commercial or residential property loans, starting at 7.7%  However, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and potential flexibility in the repayment schedule.

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Hard money loans may be used in turnaround situations, in short-term financing and by borrowers with poor credit but substantial equity in their property. Since it can be issued quickly, a hard money loan can be used as a way to stave off foreclosure.