Hard money lenders are typically regulated at the state level via the Department of Real Estate, as at least one person associated with hard money lending must have a valid Real Estate Broker License. Additional licensing requirements may be required on a state-by-state basis. Cross-state transactions fall under the jurisdiction of both states involved and are subject to each state’s respective requirements.¬† Securities licenses are usually not required for hard money lending unless a loan is classified as a securities offering due to the loan being syndicated to multiple investors

Hard money lenders are licensed differently with less regulatory scrutiny than traditional banks and can look at the merits of a loan more so than a bank, which must meet certain non-negotiable criteria to issue a loan.

It is essential for borrowers to ascertain whether a lender is reputable, to avoid disappointments, wasted time, and lost opportunities. A borrower can research a prospective lender using the following techniques: Ask for references from clients/borrowers and mortgage brokers; talk to the references. Consider working with a local mortgage broker who has done transactions with that lender; Confirm that the lender has a valid Real Estate Broker License; Determine whether any complaints have been filed against the Real Estate Broker License; Consider checking with the Better Business Bureau (BBB); Find out what industry events the lender attends and ask people at the event about the lender’s reputation.

It generally will take a hard money lender 30 days or less to fund a loan, although some are equipped to do this in two weeks or less.

It is possible for borrowers who start with a hard money lender to transition to working with a bank later in the process. This may happen if the borrower has a recent credit issue (such as a past foreclosure or bankruptcy) and the hard money lender is used to “age out” that credit issue until the borrower qualifies with the bank. A borrower may also choose to enter into a hard money loan prior to seeking a traditional bank loan in order to demonstrate performance and credit worthiness. Borrowing from a hard money lender can act as a bridge to receiving future credit in that it builds a track record and can also enhance the borrower’s financial strength, assuming the underlying investment for which the loan is used proves successful.

Banks can offer lower interest rates than hard money lenders because banks can fund loans via retail deposits on which they pay minimal interest rates. Hard money lenders fund loans via private capital which has higher expectations. For example, in early 2013 most bank depositors earn 1% or less on their deposits while most investors in private money loans expect 7% or more, to compensate for the greater risk of loss of principal.