Can you tell the difference between hard money bridge loans and peer to peer loans? If you’re considering either loan type or both, there are some important differences you should understand.
First, the major difference is that hard money loans are usually secured by real estate using a low Loan to Value (LTV) ratio (and often a high interest rate). Credit score really doesn’t matterto most lenders, because they are more interested in the high rate of return. The safety of their capital comes from the fact that they are able to foreclose on the real estate in the event the borrower defaults.
The loan is actually pretty safe for them, due to the fact that the LTV is low-balled (60 to 70% max LTV, generally), but the value itself is low-balled using a price that is deemed by the investor to be the “quick sale value.” This means the investor can usually get his or her money back in a short amount of time in case of default.
Let’s cover the bridge loan aspect of this. A bridge loan is a short term loan that is designed to bridge the time between the purchase and the securing of traditional sources of funds. Most loan underwriters require a seasoning period before they will write a new loan on a property.
For example, let’s suppose an land investor has the chance to buy a property severely under market value, but the property is going to require a lot of work. If a conventional lender will not loan money because of the condition of the property, a hard money bridge loan may be secured which would give the property buyer time to make needed repairs during the “seasoning period.” Later, the hard money loan would be refinanced conventionally at a lower rate. If you know where to look, fast hard money loans are available so you don’t have to wait a long time to complete the transaction.
Lastly, peer to peer financing is simply business or real estate loans made from one private party to another, usually not secured. For instance, a business person gets a big order, but doesn’t have the capital to buy the needed raw materials to fulfill the order. So he goes to a peer lender who understands his business and has money to lend. Peer to peer lending of this nature is increasingly becoming popular due to tightening credit markets.