Loans 101: The Difference Between Hard Money Loans and Bridge Loans
Bridge loans and hard money loans are actually very similar. They are short-term, non-traditional sources of funding that do not require a loan applicant to present a good credit history or future income. These loans are secured by the property, which serves as the collateral.
However, if you are considering getting a loan, you should know that there are also some major differences between the two types of loans.
Bridge loans. This is funding that you get to tide you over when you are buying properties. Hence, the name “bridge” loan. It’s useful when the situation does not allow you to get loan approval from traditional sources but you are not looking for a long-term investment with the property. Often, people who are selling their house and buying another will apply a bridge loan. They can use the funds to cover the down payment on the second property while the purchase of the first property is still being processed. A bridge loan can also be used by those who buy foreclosed properties for the purpose of quickly renovating them and then selling them at a profit. Another example would be a rental property that needs some fixing in order to increase its occupancy rate. The bridge loan can cover the renovation costs. This type of loan requires the borrower to demonstrate his ability to pay off the loan – through his liquidity and good credit.
Hard money loans. While bridge loans are primarily for purchasing or refinancing properties, hard money loans can be used for other purposes. Also, hard money loans are provided by private investors. Hard money loans will look not on the borrower’s ability to repay but on the value of the property. Hard money loads are generally faster to process and are thus ideal for situations where the borrowers needs to act fast. For instance, if one is offered a discounted payoff on the property, one can turn to hard money funding to avail of the opportunity to save on his current loan. Another example is when one has a property that is foreclosing soon. He needs to act quickly in order to prevent the foreclosure.
Below is a table outlining the differences of the two types of loans:
|Bridge Loan||Hard Money Loan|
|Processing time||Approx. 30 days||5 to 20 business days|
How much loan amount you can get for a particular property
Higher loan-to-value ratio
LTV can go as high as 80%
Lower loan-to-value ratio
LTV can range from 50 to 70%
Higher than the rates of traditional loans but lower than hard money loans
Interest is at about 10 to 12%
Higher interests are charged because of the inherent risk of this type of loan
Interest may go to as high as 14 to 16%
|Provider||Banks and other lending institutions||
Lenders have more control of the loan evaluation and selection process, as well as in setting the minimum requirements that are favorable to them
|Who should apply for this loan||Someone whose situation does not meet traditional loan underwriting standards means||Someone who does not have a high credit rating (i.e. had a history of foreclosure)|
|Typical term length||2 to 5 years||6 months to 1 year, but some can extend to 2 years|