There are two definitions of a hard money mortgage. The first is any mortgage loan not used to purchase the mortgaged property. This definition is used for purposes of foreclosure in states that do not allow a deficiency judgment for the purchase of money mortgages.
The second definition is a loan that is also referred to as a subprime or substandard loan. There is no exact definition of what makes a loan subprime or substandard. The classification of loans ranges from A loans (which are the best for the borrower) to B and C loans (usually having a 2%–3% higher interest rate than the highest rate A loan) to hard money loans. The hard money loans carry a much higher rate and higher points than B and C loans. There are variations within each category, ranging from small variations for A loans to the largest variations for hard money loans.
With the expanded use of adjustable rate loans in recent years, the subprime loan has come to be defined as any loan to a borrower with a poor credit rating, or in other words, loans to borrowers who should not be getting approved for these loans. The distinction between A, B, and C loans is now blurred. Because of the collapse of the housing market in 2007 and the high foreclosure rate of subprime mortgage loans, this is now changing back to the more traditional way mortgage loans are approved.