Do you understand the difference between hard money bridge loans and peer to peer loans? If you’re contemplating either type of loan, there are some distinctions you should understand.
First, the major difference is that hard money loans are loans that are secured by real estate using a low Loan to Value (LTV) ratio (and often a high interest rate). A borrower’s credit history really doesn’t matter too much to a hard money lender, because they are more interested in the high rate of return. Their security comes from the fact that they are able to foreclose on the property in the event the borrower doesn’t make the payments.
The loan is doubly safe for them, due to the fact that the LTV is low-balled (60 to 70% max LTV, typically), but the value itself is low-balled using a value that is considered by the investor to be the “quick sale value.” This means the investor can usually get his capital back in a short time in the event of default.
Let’s cover the bridge loan aspect of hard money bridge loans. A bridge loan is basically a short term loan that is intended to bridge the time between the purchase (or need for capital, as the case may be) and the securing of a conventional loan. Most loan investors require a seasoning period from the time of purchase before they will allow a property to be refinanced.
As an example, let’s say an real estate investor has the opportunity to buy a property at below it’s true market value, but the property needs a lot of work. will not loan money because of the condition of the property, a hard money loan may be secured which would offer the borrower the time necessary to make needed repairs during the “seasoning period.” Then the hard money loan would be refinanced using conventional financing at a lower rate. Frequently, fast hard money loans are available so you don’t have to wait a long time to complete the transaction.
Lastly, peer financing simply business or real estate loans made between private parties, usually not secured. For instance, a business owner gets a big order, but perhaps does not have the capital to purchase the needed raw materials to fulfill the order. So he goes to a private investor who understands his business and has some capital to lend. He is resorting to peer to peer lending in this case to get the deal done.
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