The phrase “hard money” in the term “ hard money loan” initially referred to the ability to get hard cash out of the loan. Through the years, the term has evolved to refer to loans made in situations that even sub-prime lenders won’t handle. Hard money loans are secured loans, and like any other secured loans, they are usually backed by the asset the loan will purchase. Where a hard money loan differs from a traditional secured loan is in the type of asset that can be accepted as collateral. For example, a hard money loan might be used to purchase a piece of real estate on which there may or may not be a lucrative oil reserve. I know of one hard money lender who issued a construction loan for an adult entertainment club, using the business itself as security. So, typically, hard money loans are made against high-risk assets. While construction may not seem high-risk to the average person, it can be depending on the market and what’s being built and by whom, so it is not at all uncommon to have construction financed with a hard money construction loan.
Because of the risk associated with hard money loans, most traditional financing institutions – even those specializing in sub-prime loans – will not issue them. As well, and as to be expected, hard money lenders charge much higher interest rates than traditional lenders and usually require loan terms much more favorable to themselves. For instance, most hard money lenders will only lend from the first position, so that in the event of a foreclosure, they can be sure to recover as much of the loan as possible.
Since the usual banks and mortgage lenders are not likely to extend hard money construction loans, you have to look elsewhere. The good news is that there are lenders that exist just for the reason of extending hard money loans to those individuals that cannot obtain traditional and conventional financing.
Simply running a Google search for “hard money lenders” yields hundreds of hard money lenders. Also, you can get a good list of hard money lenders at http://www.reiclub.com/hard-money-lenders.php. There are many web sites that connect those searching for these loans with lenders. All you have to do is answer a few questions about the property you will use as collateral and wait for the loan bids from different lenders.
Another great source for hard money lender options is to pick up a real estate publication that caters to the mortgage industry. You will find hard money lenders advertising their services for commercial properties, construction loans and residential properties.