Back in the pioneer days, hard money loans were virtually non-existent. The most commonly used form of money among settlers in early America was gold coins. American Indians, on the other hand, traded goods such as beads and pelts. To settle the colonies, the United States government gave away plots of land in exchange for a settler’s promise to live on the land, grow stuff such as corn or cotton, and raise livestock. To provide shelter, settlers chopped down a few trees and built their own cabins. Today, we expect to either buy an existing home or we pay a builder to build a new home for us.
For the most part, buying a home in the 21st century involves some type of financing. There are generally three parts of the purchase price:
•Earnest money deposit
•Total down payment from the buyer (which includes the earnest money deposit)
•Balance of purchase price in the form of a mortgage loan
Hard Money Loans Versus Purchase Money Loans
A purchase money loan is the money a home buyer borrows to buy a home. That home can be almost any type of structure, from a single-family residence, multiple units, a condominium, townhome, or stock cooperative to a modular or manufactured home.
Purchase money makes up part of the purchase price. The loan is secured by the property, meaning if the buyer stops making the payments, the lender may have the right to seize the home and sell that home to get its money back.
A hard money loan secured to real estate is a loan that is not purchase money. It is money loaned to a borrower, which is not used to buy a home. You can get a hard money loan without owning a home at all — without any security for that loan — providing the lender feels you are a good credit risk. A credit card cash advance is a hard money loan. Or you can get a hard money loan that is secured to equity in the home but was not part of the original purchase price. Hard money lenders usually want the borrower and the security to qualify for a hard money loan.