Commercial Bridge Loans and Hard Money Loans – Two popular Choices
After you’ve made the decision of purchasing a commercial real estate property, the next biggest decision to make is the way of financing.
It matters more than anything else if you have to win in the long run. Different types of financing will have their own set of pros and cons and you need to take a call based on what works the best for you.
You can’t simply choose a type of financing just because it was recommended by your friend, as it might have worked for your friend but might not work for you.
Thus, it’s always suggested to hire a commercial real estate loan consultant who can walk you through the stages of your decision making.
Two of the major types of real estate financing are – the commercial bridge loans and the hard money loans. Many people tend to get easily confused between the two.
But are those two really the same thing? The answer is NO.
While there are several similarities between a bridge loan and a hard money loan, they have some major differences too. Here’s all you need to know about the differences between bridge loans and hard money loans and the circumstances when one is better than the other.
Hang in tight there!
Let’s get started!
Before we get down to the differences and the similarities, let us peep into the meaning of the two types of loans.
What are bridge loans?
Bridge loans are loans that are taken for a short period of time or in other terms are temporary loans which are used for purchasing or renovating the commercial real estate property.
These loans are exclusively taken with an interest in the real estate sector and are hence referred to as commercial real estate bridge loans.
These loans can be used as an easy down payment for purchasing a new commercial property or new home even before one has sold his old house or property.
Another important usage of bridge loans is in acquiring and renovating the investment property, say a multi-family investment asset.
Now, why is this done? What is the advantage of bridge loan here?
Most of the traditional money lenders refuse to finance for such endeavors as they find it risky! That’s where bridge loans come into the picture which makes the process of loan granting much easier for the borrower.
Bridge loans are required to be paid back quickly! Hence they are called temporary loans.
Since they usually do not have mortgages, the lenders will have policies that’ll ensure that the loan amount along with the outstanding interest is paid quickly before it’s too late!
Also, read about how bridge loans works in commercial real estate
What is a hard money loan?
A commercial hard money loan is an asset-based loan financing by using which the borrower receives the required amount of money by mortgaging the real assets or commercial real estate property.
These loans are usually lent by the private lenders and not by the banks.
These loans are issued for a very short period of time and the private lenders will have policies that’ll ensure speedy repayment of the loan amount along with the outstanding interest amount.
These loans are issued on the basis of the collateral security given by the borrower and not based on the credit lines of the borrower.
Thus if you’ve got a problem with your banker who’s not processing your loan request because you have poor credit showing up in the bank application, you can always seek the help of the private money lenders who shall grant the loan to you, only based on the mortgaged property’s asset value and not just simply on your credit profile.
Thus the whole process gets much simpler with the hard money loans!
How do hard money loans stand different from the bridge loans?
Number 1 – Hard money loan is a type of bridge loan!
A bridge loan doesn’t need to be a hard money loan. Here the money usually comes from the traditional lending/banking institutions according to the lines of credit the borrower has maintained.
On the other hand, a hard money loan is a type of bridge loans which is issued for a shortest period of time. The hard money loan is also referred to as the short-term bridge loans in the commercial bridge loan financing terms.
Thus, a bridge loan needn’t necessarily be a hard money loan but a hard money loan is a short-term bridge loan.
Number 2 – The financiers of the loans are very different
Although both bridge loans and hard money loans are short-term loans, they are not financed by the same party. A private lender who lends a hard money loan might not be willing to lend a bridge loan.
The reason behind is simple.
Both hard money loans and bridge loans have their own set of pros and cons and according to these pros and cons, a lender may be or may not be willing to take any risk in providing the loan.
The difference lies in the risk-taking capacity or the willingness of the loan providers.
Thus, if your friend has told you about a lender who’s issued a hard money loan, it doesn’t necessarily mean that the same lender will be interested in issuing a commercial mortgage bridge loan for you.
Number 3 – Bridge loans are issued by banks too
Bridge loans are many a time issued by banks too. Banks will conduct their ways to ensure the repaying capacity of the borrower and accordingly set the maximum borrowing limits.
They shall do this based on the common lines of credit a borrower has. But on the other hand, hard money loans are only financed by the private investors or private money lenders.
Banks do not indulge in the business of lending hard money loans because of the short period of time involved factor and because the borrower is not having good lines of credit.
Number 4 – The purpose of the loan
Commercial real estate bridge loans are issued for the specific purpose of purchasing or renovating the commercial real estate property. They are taken to fulfill this purpose and they shall be utilized only to the extent of fulfillment of this particular purpose.
They are not free to be used for other purposes. Especially because the banks are playing a major role here, these loans are to be applied for the pre-specified objective and purpose only which will at all times be something revolving around the purchase or renovation of the real estate property.
But on the other hand, hard money loans can be utilized for any purpose.
The private lenders are not interested to know the purpose of your loan. You shall be getting your hard money and the short period of time to repay the amount.
Thus you get an ease of operation when you finance a hard money loan as compared to a commercial bridge loan.
But if you are very sure about the purpose of your loan and you know that you’ll be applying it for purchase or renovation of your commercial real estate property, then choosing for a bridge loan is more advisable!
Number 5 – Ease of acquiring
Hard money loans are much easier to acquire because the private investors don’t get as nosy as the bankers would in case of a bridge loan. Banks have a reason to act picky because they’re issuing the bridge loan based on the lines of credit of the borrower.
Whereas in case of a hard money loan, private investors will issue you a loan simply on the basis of your collateral security. Thus if you want quick cash and don’t have any time to waste, it’s always suggestible to choose for a hard money loan over the commercial bridge loan.
Anyways, since hard money loan has an ease of application, you can use your money to fulfill any of your immediate requirement.
Number 6 – Loan to Value (LTV ratio) ratio
Loan to value ratio is the ratio between the loan amount to the amount of the collateral security that’s given as mortgage by you.
Hard money loan has much lesser LTV ratios than the bridge loans. Thus if the value of your mortgage is not very proximal to the value of your loan, it’s a wider option to choose for a hard money loan.
This also prevents wastage of time because in case you’ve applied for a bridge loan, the banks will reject your loan proposal after wasting enough of your time saying the LTV ratio doesn’t suit their loan requirements.
They were some of the major differences between a hard money loan and a bridge loan. At the end of the day, what matters the most is the compatibility factor.
In certain cases, a bridge loan might work out best for you and in other cases, a hard money loan might be the best catch. This decision can only be made after closing weighing the pros and cons of the two types of loan I’m light with the time period you have, the value of your collateral security, the credit lines you have and so on.
Accordingly, a call needs to be taken! Make no wrong choice in selecting the type of your commercial real estate financing! Because it matters a lot in adding up to your total profit availed from the transaction. Having said that, have a happy financing experience!