Hard money lenders are lenders who provide financing without any credit or income qualifications required from the buyer (Typically). It's an equity driven loan product where the lender knows that if the buyer defaults, they can foreclose and get all their money back. They are typically between 9-15% in interest rate and they usually cost 3-5% in loan fees. Very expensive loans. They are ideal for short term financing and fast closings.
For instance, let's suppose you found a $500k property on sale for $250k. You don't have $250k but you have $125k. You find a hard money lender to provide $125k in financing and you pay $125k down. These lenders will often be able to close as fast as a cash transaction and you can buy the property in a timely fashion. If you're paying 12% and you paid $4-5k in fees for that loan, it's probably worth it to get the $250k equity in the property. You can then decide if you want to refinance or flip the property.
That is just one scenario in which hard money is used. For the purpose you illustrated earlier, it may be costly to pay that loan for 3 years while you wait for your foreclosure seasoning. It may be worth it if the house is cheap enough and you put enough down, but it all depends on the financing available and how good of a deal the property is.