There appears to be a lot confusion surrounding this term "hard money" or "hard equity"loan. Exactly what is it?

A hard money or an asset based loan, as it is often referred to, is a loan made whereby the lender looks primarily to the collateral for repayment. The borrower's willingness and or his ability to repay is less important.

When a commercial bank contemplates a loan to a borrower the last thing it wants is to foreclose and it will ask itself three questions:

1. Can the borrower pay ? In other words it looks at the capacity of the borrower to service the debt. Does he or she have sufficient income? Does the property generate enough cash flow? Does the borrower have a secondary means of repayment should all go bad? What kind of other debts does the borrower have and is that going to interfere with making payments on this loan?
   

2. Will the borrower pay ? Has he or she demonstrated that he or she pays on time? What is the credit score? What do other people in the community say about this person? Will the lender be forced to hound the borrower for payments?
   

3. Can the borrower be made to pay ? Not just by foreclosing against the collateral but can we sue and get our money?

An asset based or hard money lender generally ignores, to a greater or lesser degree, the first two caveats. As a result the hard money lender, who we presume is no fool, will look very closely at the collateral and will generally lend less than a banker would against the same property.

There are often good reasons to get a hard money loan but getting a larger loan against the same property shouldn't be one of them.

Hard money lenders generally make lower loan to value loans than mainstream financial institutions because they know that, generally, people wouldn't come to them if they could borrow the money on better terms elsewhere.

There are of course exceptions to the above, but lets get real, it's cheaper to borrow from a mainstream source if you can. Sometimes your personal, often perfectly legitimate, circumstances prevent you from doing so. You are self employed and your income the past three years has been awful and yet you have this killer deal you told your banker about and he just laughed in your face. Or you hate the I.R.S. and "forgot" to file returns. Or you always paid your bills on time until 3 years ago when your wife got cancer and your insurance failed to reimburse you.

Often the property in question, like vacant land or an empty apartment building or a mismanaged motel in poor shape, make mainstream bankers puke. They tell you to go solve the problem first and then come back. Well, by that time you don't need them anymore, duh!

So to reiterate, a hard money lender wants to know that if you don't pay he can foreclose and be just fine. We like to sleep nights and not lay awake worrying if you will pay or not.

Frankly , we want you, to lay awake if it comes down to that.