While most people know about traditional bank loans, such as mortgages, hard money loans are somewhat less familiar to the common investor. Traditionally, a hard money loan is used in commercial real estate or business acquisitions, however anyone may be eligible to apply for one. Before seeking a hard money loan, you will want to understand the nuances and risks associated with one. The following is some basic information you should know before applying for a hard money loan.

First of all, hard money loans are short term, which means they can be paid off in as little as thirty days with no pre-payment penalty. The simplest way to understand a hard money loan is to think of it as a cash advance for an investment opportunity. For example, if a property deal is being offered at a competitive rate but only if closed on within a month, then an investor will need access to funds immediately. A typical bank mortgage requires extensive underwriting, including appraisals and credit checks, which is a time consuming process. A hard money loan is based on the value of the collateral rather than the creditworthiness of the borrower; therefore, the loan can be issued without much delay. The tradeoff for timeliness, however, is high interest rates and fees. A wise investor should be able to pay off the loan quickly, knowing that the initial high interest rates will be made up in the investment return.

In order to protect the lender, a hard money loan often comes with a low loan-to-value (LTV) ratio. The LTV ratio is the amount of the loan divided by the total value of the asset. Thus, if a lender loans $900,000 toward a $1 million […]