Hard money loans vs. conventional investor loans

In matters of loans in real estate, asset-based loan financing of various kinds can be sourced of which there are hard money loans as well as conventional investor loans. Although they do provide the means to a similar end, however, they are very different when it comes to certain characteristics of loans. The dichotomy of private money lending and established commercial banks, and is one the major reasons for the differences between the two.

Hard money loans are never given by commercial banks but only by private lenders based on collateral, which is the quick-sale value of the real estate property in question here. Obviously the interest rates are much higher while they only pay about 70% to 80% of the property value, while the remaining amount has to be footed by the borrower himself.

Now the interest rate in hard money loans does not depend on the Bank Rate (like conventional investor loans), they do depend on factors like the real estate market and the availability of hard money credit. For almost a decade, the interest rates have hovered anywhere between 12 % to 21%, and what makes this more dangerous if the borrower defaults is that the default rate is anywhere between 25% to 29%.

Although conventional investor loans will not given out by banks to individuals with bad credit, hard money loans normally ignore this criteria since the asset is used as ‘insurance’ in this case. The latter (Hard money loans) will also make allowance for the situation where arrears on the existing mortgage, bankruptcy and foreclosure proceedings are pending.