In real estate investing, choosing the right type of loan can greatly influence the success of a project. When you need quick financing for property purchases or renovations, two types of asset-based loans are commonly considered–bridge loans and hard money loans.
Although these loans are similar in that they are both short-term, they serve different purposes and come with distinct terms and conditions. Understanding the key differences between bridge loan and hard money options is critical for making an informed financing decision.
Purpose of the Loan
Bridge loans are specifically designed to “bridge the gap” between the purchase of a new property and the sale of an existing one. These loans are typically used when an investor or homebuyer needs short-term financing to secure a new property while waiting for the sale of another asset.
For example, if you want to buy a new home but have not yet sold your current property, a bridge loan can provide the funds needed to complete the purchase before your old property sells. It helps investors manage liquidity gaps between transactions.
In contrast, hard money loans are primarily used for property acquisition or renovation. These loans are secured by real estate and are commonly used by real estate investors looking to fix and flip properties. The primary purpose of a hard money loan is to give investors access to quick funds for the purchase, renovation, or refinancing of a property.
While bridge loans help in transitioning between properties, hard money loans focus more on acquiring and improving properties to either sell or rent for long-term profit.
Type of Lender
Bridge loans can be provided by both traditional financial institutions, such as banks, and private lenders. This is because bridge loans are often used in more conventional scenarios, like real estate transactions between buying and selling properties.
Banks and credit unions may be willing to issue a bridge loan, especially if the borrower has a good credit history or an established relationship with the bank. In such cases, the terms can be more competitive, but the approval process may take longer.
Hard money loans, on the other hand, are generally provided by private lenders or investor groups. These loans are typically offered by individuals or small lending companies that specialize in real estate investing.
Hard money lenders tend to focus on the value of the property itself as collateral, rather than the borrower’s creditworthiness. This makes them an attractive choice for borrowers with poor credit or unconventional financial situations. They provide an alternative for those who may not qualify for conventional loans.
Loan Amounts
The amount of money that can be borrowed in both bridge and hard money loans varies. However, typically, bridge loans tend to have higher loan limits. A bridge loan might deliver a larger sum, especially if it is backed by a high-value asset like a residential property or commercial real estate.
The loan amount is often calculated based on the value of the properties involved in the transaction—both the one being sold and the one being purchased. Bridge loans generally aim to cover the gap between the two transactions, including the cost of the new property and any additional costs like fees, taxes, or insurance.
Hard money loans tend to offer smaller loan amounts compared to bridge loans. These loans are often more specific to real estate investment purposes, such as property flips or renovations. The amount you can borrow in a hard money loan depends primarily on the property’s current value. Lenders also consider the expected after-repair value (ARV) after renovations.
Hard money lenders typically provide loans ranging from 50% to 75% of the ARV. They take a more cautious approach with loan amounts and often lend less than what might be available through a bridge loan.
Loan Terms and Repayment Schedule
When it comes to loan terms, bridge loans typically offer a repayment schedule that spans from a few months to one year. This short-term loan structure allows borrowers to quickly transition between properties and settle the debt once the previous property has been sold.
The repayment schedule for a bridge loan is generally fixed. It may come with lower interest rates compared to hard money loans. In some cases, bridge loans may offer interest-only payments for the term of the loan, with the principal due at the end of the term when the property is sold.
In contrast, hard money loans tend to have slightly more flexible repayment structures but with higher interest rates. The term of a hard money loan is generally short, ranging from six months to three years. However, the repayment schedule can vary depending on the lender’s terms and the project’s requirements.
For example, many hard money loans feature interest-only payments for the duration of the loan. The full principal is then paid at the end of the term, often after the property has been sold or refinanced. These loans can also come with higher interest rates, usually between 8% and 15%, due to the higher risk associated with these types of loans.
Collateral and Loan Security
One of the defining features of both bridge loans and hard money loans is that they are both secured by real estate assets. However, the nature of the collateral may differ slightly. With bridge loans, the collateral is usually tied to the property being sold and the property being purchased.
The bridge loan serves as a temporary bridge between these two transactions. The security is based on the sale of the existing property and the purchase of the new property. If the borrower defaults on the loan, the lender has the right to seize the assets involved in the transaction.
On the other hand, hard money loans are typically secured by the property that is being purchased or renovated. In this case, the collateral is solely the real estate itself. If the borrower defaults on a hard money loan, the lender can foreclose on the property and sell it to recover the loan amount.
This makes hard money loans especially appealing to investors who prioritize the property’s potential. Instead of focusing on creditworthiness or financial history, lenders base decisions on the property’s value.
Interest Rates and Costs
When comparing bridge loans and hard money loans, one of the most noticeable differences lies in the interest rates and overall costs. While both loan types tend to have higher interest rates than traditional loans, hard money loans typically carry much steeper rates due to the increased risk they pose to lenders.
The high-interest rates on hard money loans reflect their purpose. These loans are often used by borrowers with poor credit or those unable to secure conventional financing. Interest rates for hard money loans typically range between 8% to 15%. However, they can go even higher depending on the lender and the loan’s terms. Borrowers must also be aware of other associated costs, such as origination fees, processing fees, and other charges, which can add up quickly.
On the other hand, bridge loans usually have lower interest rates compared to hard money loans. Since they are offered by both traditional financial institutions and private lenders, borrowers can sometimes secure rates as low as 5% to 8%. This depends on their creditworthiness and financial background.
Additionally, bridge loans are often used in more predictable scenarios, such as buying a new home while waiting to sell an existing one. Because of this lower risk, lenders may provide more competitive rates. While the rates are lower, the cost of a bridge loan can still be significant due to associated fees and other charges. However, they tend to remain lower than those of hard money loans.
Speed of Approval and Disbursement
Both bridge loans and hard money loans are designed to offer quick access to capital, but there are some variations in how fast funds are disbursed and the approval process. For real estate investors, speed is often essential when it comes to securing a property in a competitive market.
Hard money loans typically have faster approval and disbursement times, often within a few days of applying. This speed is one of the primary reasons investors turn to hard money lenders for their financing needs. The application process for hard money loans tends to be simple, requiring minimal documentation.
Bridge loans, on the other hand, can take longer to process, particularly if they are offered by traditional lenders such as banks. The approval process for bridge loans can take several weeks as banks often require more detailed documentation and financial analysis of the borrower’s situation.
In contrast, private lenders who offer bridge loans can often approve the loan faster. However, they may still take longer than hard money lenders due to the higher amount of scrutiny involved. In general, if speed is a key factor for your real estate project, hard money loans tend to be the faster option.
Loan Term Length
One of the significant distinctions between a bridge loan and hard money loan is the length of the loan term. Both types of loans are short-term financing options. Meanwhile, they have different timeframes depending on the loan type and the borrower’s needs.
Bridge loans generally have a loan term ranging from a few months to one year. Since they are meant to “bridge the gap” between the purchase of a new property and the sale of an existing one, the term is relatively short.
The goal is to pay off the bridge loan quickly once the existing property has been sold and the borrower has the proceeds available to repay the loan. Because of the short loan term, bridge loans typically feature interest-only payments. This means the borrower only pays the interest on the loan during its duration, with the principal being repaid at the end of the term.
In contrast, hard money loans are also short-term loans. However, they tend to have slightly longer terms. These loans usually last between six months and three years, with the average term being around 12 to 18 months.
Flexibility in the Use of Funds
The flexibility in how you can use the funds from a bridge loan versus a hard money loan is another key difference. Bridge loans are typically used to facilitate real estate transactions. They help investors or homeowners purchase a new property before selling their existing one.
In essence, bridge loans are meant to fill the gap between the sale of an old property and the purchase of a new one. As a result, the funds from a bridge loan are generally tied to specific properties and must be used for the transactions involved in buying and selling real estate.
Hard money loans, on the other hand, offer greater flexibility in how the funds are used. These loans are primarily designed for real estate investment purposes, including the purchase, renovation, or refinancing of properties. Borrowers can use the funds to acquire distressed properties, make improvements, and increase the value of the property before reselling or renting it out.
Approval Requirements
The approval requirements for both bridge loans and hard money loans are different, primarily based on the financial situation and the type of property being purchased. Bridge loans typically require a higher level of financial documentation, especially when provided by traditional financial institutions.
Lenders will usually require proof of income, credit scores, and detailed financial statements to assess the borrower’s ability to repay the loan. This makes bridge loans more suitable for borrowers with a stable financial background. They are ideal for those involved in standard real estate transactions, such as buying and selling residential properties.
In contrast, hard money loans are primarily focused on the value of the collateral property, rather than the borrower’s financial background. Lenders will assess the property’s after-repair value (ARV) to determine how much they are willing to lend.
As a result, hard money loans are accessible to a wider range of borrowers, including those with poor credit or unconventional financial situations.
Get Started with Flexible Financing Solutions!
Coastal Capital Lending specializes in offering hard money loans with flexible terms and fast approval processes. Whether you are purchasing a property for renovation or securing short-term funding for a bridge, our team is here to guide you through every step of the process.
With a focus on property value rather than credit scores, we are ready to help you succeed in your real estate investment ventures.
