Hard money loans and commercial bridge loans are real estate investment strategies that sometimes leave people scratching their heads. Both phrases are incorrectly used interchangeably, and their relative merits and demerits are also misunderstood.
However, it is important to understand the differences to ensure you know how and when to use various loan products to your advantage. You must also understand the advantages of hard money bridge loans to make the right choice.
What’s the Distinction Between a Hard Money Loan and a Bridge Loan?
Lenders adapt to a constantly shifting risk environment, which is reflected in the variety of loan products and their associated terms. However, this makes it challenging to understand the jargon and apply for the right loan product.
Hard money and bridge loans are short-term loans that can be approved quickly and have lenient repayment terms. In fact, hard money loans can be defined as the most lenient type of bridge loan regarding the borrower’s credit history and employment history, focusing solely on the “hard” asset at hand.
Both might be based entirely on the value of the property being used as collateral without considering the borrower’s credit score. This approach also means that they are typically available with rapid turnaround.
As opposed to long-term mortgages, both are primarily short-term or temporary loans. This makes them perfect for rehabilitation projects and other circumstances where the borrower intends to resell or refinance the property in the near future.
These loans accommodate the borrower’s conditions while still pleasing the lender. In addition, they often lack prepayment penalties and frequently permit the borrower to make interest-only payments until the principal balance is due. The tradeoff of this flexibility is higher interest rates compared to conventional loans.
While private lenders always provide hard money loans, bridge loans are sometimes made available by conventional lenders, such as banks. Therefore, while most bridge loans are also hard money loans, this is not always the case.
Ask your banker if their organization may consider your request for a bridge loan. Banks’ interest rates are far lower than those on hard money loans. However, establishing a relationship with a hard money lender before you need one might be a valuable investing tool.
In conclusion, although bridge loans and hard money loans share many similarities, they are not interchangeable terms. The primary distinctions are who makes the loan (private or institutional lender) and how the cash can be spent.
When to Opt for Bridge Loans
Bridge loans are used by real estate investors that need to swiftly acquire commercial property, eliminate a roadblock, or meet a contractual commitment. A buyer in the first scenario might feel compelled to be first to the closing table if they learn the property in question is a hidden gem with growth potential.
In the second scenario, the owner may have an existing property that is in need of significant upgrades and has low occupancy rates. The owner has reason to believe that some strategic upgrades would increase occupancy rates and, consequently, the property’s value. It might be in their best interest to receive a bridge loan until they can qualify for a loan with more favorable terms.
When to Opt for Hard Money Loans
Borrowers who don’t qualify for conventional mortgages may benefit from applying for hard money loans. For example, if the borrower has had a recent arrest, a credit score of 500 or below, or recent mortgage default. Maybe they’re buying land to construct and run a hotel, but they’ve never done it before.
Hard money loans are designed to bridge the gap left by traditional lenders. Since the lender takes on the greatest amount of risk, they also demand the highest interest rates. Unlike traditional banks, hard money lenders are completely unregulated and run by private individuals.
Hard money loans have a negative connotation because they attract predatory lenders known as “loan sharks,” who may engage in practices such as loan-to-own or even just take the down payment and go when the closing time rolls around. Even so, dependable, hard money lenders may be located, and some opportunities merit this kind of investment.
Advantages of Hard Money Bridge Loans with DFW Specialty Lending
Looking for a reliable specialty lender? DFW is here for you. There are numerous advantages of hard money bridge loans. Here are the top three advantages you can get by working with DFW Specialty Lending:
1. Home Loan Closing Times That Are Quicker
Working with large banks to secure conventional financing for investment homes can be a lengthy process. Large banks typically require numerous rounds of internal approval and close within 60 days.
There is significantly less bureaucracy when working with a hard money lender, so decisions are made considerably faster. Many hard money lenders can close in as little as 7 to 10 business days; if the title is prepared and all paperwork is in line, monies can be received in as little as 2 to 3 days.
2. Fewer Conditions for Loan Acceptance
In addition to speedier closing times, a crucial advantage of working with a hard money lender over a typical bank is that hard money lenders require less personal documentation for loan approval. Private lenders are more concerned with the property’s value than the borrower’s personal income or credit history.
Although private lenders can and do analyze risk and reject transactions for various reasons, obtaining finance from a hard money lender is typically simpler when all aspects of the procedure are addressed.
3. Greater Quantity of Projects for Investors
Working with a hard money lender enables investors to undertake more projects by leveraging their capital and maintaining their own cash. Many hard money lenders would lend on many projects at once, supporting the rehabilitation of entire city blocks on occasion.
Even after years of establishing a relationship, a large bank is unlikely to allow this degree of freedom. When you cultivate a relationship with a hard money lender, they may become more at ease with your investing strategy and offer you better terms over time.
Get in touch with us today to learn more about our loan product and receive consultation regarding the best options for you.