Do you understand the difference between hard money bridge loans and peer to peer loans? If you are thinking about either type of loan, there are some distinctions you really must understand.
First of all, let’s start with an overview of hard money. Hard money loans are loans that are secured by a piece of property using a low Loan to Value (LTV) ratio and a high interest rate. Credit score really doesn’t matterto hard money investors, because they are more interested in the high rate of return. Their security comes from the fact that they can foreclose on the piece of property in the event the borrower happens to default.
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 of the property itself is low-balled using a price that is deemed by the investor to be the “quick sale price.” This means the underwriter can usually get his money back in fairly short order in case of default.
Now, let’s take a look at the bridge loan aspect of hard money bridge loans. A bridge loan is basically a short term loan that is designed to fill the gap between the purchase (or need for capital, as the case may be) and the securing of traditional finances. Most loan underwriters require a seasoning period from the time of purchase before they will refinance a property.
For example, let’s say an foreclosure investor has the opportunity to purchase a property severely under market value, but the property needs a lot of work. When conventional lenders will not loan money because of the condition of the property, a hard money bridge loan may be secured which would offer the real estate buyer time to make needed repairs. Then the hard money loan could be refinanced using conventional financing at a lower rate. Frequently, fast hard money loans are available so you don’t have to wait forever to complete the transaction.
Lastly, peer financing simply business or real estate loans made between private parties, usually not secured. In a typical scenario, a business owner gets a big order, but perhaps does not have the money to purchase the raw materials to complete the order. So he goes to a private investor who knows his business and has some capital to lend. Peer to peer lending of this nature is increasingly becoming popular due to tightening credit markets.