The great thing about private lenders is that there are typically a few different loan options for borrowers to consider, but how do you know which type of loan is right for you? Many factors can determine eligibility to receive one based on credit history and value of assets or property, and often how fast you plan to pay back the money borrowed. The two most common types of loans people might often hear about are bridge loans and hard money loans. Although both have pros and cons, each loan type serves a specific purpose. Still, understanding the primary differences between the two as well as some similarities can further help clarify which loan might best suit an individual and their financial endeavor.
What Is A Bridge Loan?
Before we compare a bridge loan vs. a hard money loan, let’s discuss each type of loan and what they are generally used for. A bridge loan is a temporary, short-term loan usually given by a bank or private lender to cover the interval between transactions, most notably buying a new home before selling another. These loans are meant to “bridge” the gap of property investment when the profit from a sale is not yet made available. An example of this would be applying for a $100,000 loan to pay off the remaining $50,000 still owed on a mortgage, with the remaining $50,000 being used towards the down payment of a new home. Another use of bridge loans that makes them attractive is how quickly the funds are made available to borrowers, often those who are looking to fix distressed properties and flip them for profit. Because these loans are short-term, the average lifespan can range anywhere between 2 weeks to 12 months and, in some cases, three years, depending on the financing arrangement.
What Is Hard Money?
As you may know, hard money loans are asset-based loans in which a borrower receives money secured by property collateral. These types of loans are most often issued through private lenders like HouseMax Funding, with the asset being purchased used as collateral to minimize risk for both the borrower and lender. Hard money loans are widely used for real estate investments and are fantastic for building a portfolio. However, these loans are better suited for fast turnaround projects with solid exit strategies, such as house flipping or other rehab projects. Although bridge loans are sometimes considered a type of hard money loan, most private lenders do not use these terms interchangeably because of their qualification requirements. Unlike hard money loans, bridge loans usually don’t involve property collateral, but they do look at credit score and employment history.
What Are The Pros and Cons of Bridge Loans?
- Provides borrowers the ability to purchase a new home while the current home is on the market or if they sell their home before a new one is purchased, so they do not have to rent
- Funds are accessible quickly
- Payments can be deferred or interest-only until profit from a previous home sale is made
- Down payment can be put towards a new home without tapping into profits from the old home sale
- Looks at credit history instead of income and the Ability-to-Pay Rule
- Gives buyers greater purchasing power when making an offer on a property
- Short term loans have a lifespan typically no longer than 12 months, making it risky if your old home does not sell within that time
- Interest rate could also increase over time, depending on payment agreements with the lender
- Closing costs and fees can be high
- Can be more expensive compared to a home equity loan, which would use your house as collateral but allow a much longer term to pay
What Are the Pros Of Hard Money Loans?
- Funds are available in just days
- Unlike conventional loan lenders, hard money lenders look at the value of the property instead of the income-to-debt ratio and credit score
- Easier to receive funds for fix and flip projects
- More flexibility in repayment scheduling than bank-issued loans
- Can be used as the first step in real estate portfolio building strategies like the BRRRR method
- Like bridge loans, they are short-term and expected to be repaid in 12 months to 3 years
- Higher interest rates between 8 to 12 percent, depending on the lender
- A larger down payment might be required at around 25 to 30 percent (which is why it’s important to choose a trusted private lender)
- Risk of default of foreclosure if payments are delinquent or the project does not return what was borrowed, in which case the lender owns the property and can then sell it
At the end of the day, borrowers must weigh out the pros and cons and see what type of loan best fits their situation. It is important to understand that bridge loans are strictly used for buying homes or property when funds are not yet accessible to buyers who have a home on the market. In comparison, hard money loans are used chiefly towards property renovation, house flipping, and immediate funding for cases. If you have questions about bridge loans vs. hard money loans, contact HouseMax Funding! We’d be more than happy to walk you through the hard money loan application process or answer any questions that you might have.