Borrowers with bad credit often have a hard time qualifying for a regular mortgage loan. That’s because traditional banks and mortgage lenders base their lending decisions on the borrower’s credit history (among other factors). In short, having a bad credit score can reduce your chances of getting a loan from a traditional lender.

But California real estate investors have other options as well, and the “hard money loan” is one of them. Let’s start with a definition and move on from there.

A hard money loan is a secured loan based on the value and investment potential of the property being purchased, rather than the borrower’s creditworthiness. Real estate investors in California often use hard money loans to finance the purchase, renovation, or development of investment properties.

This option offers certain advantages, especially when it comes to the borrower’s credit score and history. With a hard money loan, the lender qualifies the property being purchased, instead of the individual borrower. As a result, these loans can be a good option for borrowers who may not qualify for a traditional mortgage due to having poor credit.

In some cases, these loans can function like a bad credit home equity loan. They allow borrowers with credit-related issues to take out a home equity loan against one property, and to use those funds to purchase an investment property.

So you’re basically using the value and equity of one home to buy another. This gives investors with past credit problems a financial “workaround” to achieve their investment goals.

Borrowers with bad credit can use hard money equity-based loans for projects expected to generate a profit, such as flipping houses or new construction. They have many uses.