It is no secret that hard money and bridge loans are different from conventional financing. Both types of loans are drastically different. If you are not sure why, this post is for you. Learning more about hard money and bridge loans could help you understand why some types of borrowers prefer them over traditional loans.
Understand that banks do not provide hard money loans. They may provide bridge loans, but they do so using conventional lending principles. So their bridge loans are not identical to those offered by hard money lenders.
With all of that said, here are four things that make hard money and bridge loans so different:
1. They Are Provided by Private Lenders
The first thing to note is that hard money lenders are private lenders. They are not banks or credit unions. They also aren’t private mortgage lenders. Hard money lenders are a specific type of private lender that specializes in hard money and bridge financing.
A hard money lender could be a single person with a lot of money to invest. It could be a firm managed by partners and funded by the contributions of multiple investors. Salt Lake City’s Actium Partners is a good example of such an arrangement.
2. Lending Is Based on Asset Value
Hard money lending is asset-based. This means that loan decisions are based on asset value. For example, imagine a real estate investor attempting to purchase a strip mall on the outside of town. A hard money lender will not dig into his financial details and credit history. Instead, the lender is interested in how much the property is worth.
Asset value is the key factor regardless of whether the investor is looking for a hard money or bridge loan. The property being acquired is collateral, so it needs to have enough value to cover the amount being borrowed.
3. Higher Rates and Shorter Terms
Both hard money and bridge loans are known for their higher rates and shorter terms. Interest rates can be several percentage points higher than what traditional lenders are offering. As for terms, they tend to be 24 months or less. Occasionally you can find a hard money lender willing to go up to 36 months. Anything longer is a true rarity in hard money.
Higher rates in shorter terms are risk management tools for lenders. But they are not all bad for investors. Short terms offer two key benefits: they get an investor out more quickly and they limit the total amount of interest paid.
Most people hear higher rates and automatically think hard money and bridge loans are a bad deal. But when you consider that loan terms ultimately play a much bigger role in total interest paid, you come to realize that extremely short terms actually reduce total interest. The shorter the term, the less a borrower pays.
4. Time From Approval to Closing
Finally, the most noticeable difference with hard money and bridge loans is the amount of time it takes to get from approval to closing. On average, you are looking at a week or two. But it can happen much quicker. Actium Partners has been known to fund loans within a day or two of approval. That is fast.
It goes without saying that hard money and bridge loans are drastically different from their conventional counterparts. The things that make them different are the same things that make them so attractive to real estate investors and small business owners. Hard money and bridge loans represent valuable funding options that certain borrowers just cannot resist.