4 Hard Money Loan Scams to Watch Out For

By Moolah List

4 Hard Money Loan Scams to Watch Out For

By Moolah List

Hard money loans are non-bank loans provided by private lending companies to commercial and residential real estate investors.

The term "hard money" refers to the fact that these loans are made based on the value of the property used as collateral rather than the creditworthiness of the borrower.

Because there is less reliance on traditional factors like the borrower's credit score or employment history; hard money loans can be executed faster than loans originated by traditional financial institutions.

However, the fact traditional financial institutions are not involved and a transaction can be executed quickly can sometimes result in the borrower being the victim of a scam.

Below we explain the four most common hard money loan scams and offer some tips to avoid them.

Too Good to Be True

If the terms of a loan are so favorable they outshine all other lenders by a considerable margin, be on guard; the deal is probably a scam.

  1. Interest Rate - Watch out for terms that include an interest rate well below market or competitors’ rates. Hard money loans have interest rates anywhere from 3 to 5 percentage points above the rates charged for a traditional mortgage. A typical interest rate is between 7 and 15 percent with the biggest factors being the state you live in and the value and stability of the local real estate market. If the rate being offered is below that range, tread very carefully as the deal may be a scam. 
  2. Collateral - Hard money lenders will always require collateral to be held. This is usually done through holding the trust deed.

How to Avoid:

To avoid this scam you should be aware of current local market rates, standard collateral requirements and other terms of a typical hard money loan.  

When a proposal is out of the ordinary, and seems “too good to be true,” it most surely is.


There are many trustworthy lenders you can take your deal to.

Bait And Switch

The bait and switch is a tactic that lends itself well to hard money scams.  

At the outset, very favorable terms are offered, aka the bait.

Hard money lenders will advertise cheap rates to capture your attention. 

The lender will offer a teaser interest rate of something like 5.99%, however once you get further along in the process you will find in order to qualify for this rate the borrower must have a great credit score, large cash reserves and a 2 or 3 year commitment with a pre-payment penalty attached. 

Another type of bait and switch is when the lender changes the requirements just before closing and the terms are altered in a manner harmful to the borrower.

Oftentimes borrowers of hard money loans are under tight timelines and a scammer or unsavvy lending company may take advantage of this.

How to Avoid:

To avoid the bait and switch scam it is advisable to discuss the terms of the loan with the lender and ask them to provide a"term sheet."

The term sheet lists all the important terms of the loan.

As they say, "the devil is in the details," so make sure to read all the fine print.  

Look on the lender's website to see if their lending guidelines are published for all the world to see.

Asking for Cash Up Front

One sign a scam is in the works if is a lender is asking you to wire money for upfront fees, before they will fund your loan.  

Here is a list of common fees the lender may ask you for prior to providing funding:

  • Due diligence fee
  • Application fee
  • Documentation fee
  • Title and escrow fee
  • Origination fee
  • Underwriting fee
  • Appraisal fee
  • Credit report fee

Though these fees are legitimate and common in the hard money lending business, they are almost always rolled into the cost of the loan.

A legitimate lender will never ask you to wire money for upfront fees before they’ll fund your loan.

Unfortunately, many borrowers fall victim to this hard money scam.

How to Avoid:

Upfront fees are often paid to scammers simply because it seems reasonable at the time that money be paid to cover the cost of executing the transaction.

The scammer may present the argument an upfront fee is necessary to assure that one is serious about getting a loan and the upfront fee is proof the borrower is legitimate.

Unfortunately, more often than not, the loan is never funded and the lender vanishes into thin air.

Legitimate lenders will not request payment, prior to doing any work.

Identity Theft

While hard money loans rely less on personal financial history and more on the value of the collateral, there still exists the need on the part of the borrower to submit sensitive personal documentation to the lenders.

If this information falls into the wrong hands, there exists the possibility of identity theft.

How to Avoid:

The best way for you to prevent identity theft is to do proper due diligence on the lender. 

  • Ensure you are dealing with a legitimate lender before submitting any personal information.
  • References should be obtained from title companies or other borrowers whom have worked with the lender before.
  • Ask the lender about their pre-established requirements for loan approval. If they don't have any, turn and run!
  • A real lender will almost always want to appraise the property.
  • Search Google using for the lending company and try to find any reviews or forum postings by other borrowers and if any complaints exist.
  • Confirm the lender is registered in your state.
  • Only after you are 100% positive that you are dealing with a reputable licensed lender should you provide sensitive information such as bank account numbers and social security numbers and date of birth.

Some Additional Tips

  • Carefully read the contact. Be alert for misspelled words and grammatical errors when reviewing written communications by the lender.
  • The contract should spell out the fees charged by the the lender clearly.
  • Watch out for ambiguous requests for personal information.
  • Be wary of a lender asking for the title of the property to be transferred into the lender’s name.
  • Legitimate hard money lenders will have a website with a real domain. There email address will likely not be @gmail.com, rather it will match their website like @somecompany.com.

Look out for yourself and listen to your gut instincts and you will not fall prey to the unscrupulous tactics of hard money scammers.

Fortunately, here at EmpireFunders we work hard at maintaining a list of verified and licensed hard money lenders who conduct business in an honest and reliable way.

In this guide we expore the following:

  1. Too Good to Be True
  2. Bait And Switch
  3. Asking for Cash Up Front
  4. Identity Theft
  5. Some Additional Tips

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