Bridge Loans vs Hard Money Loans: Key Differences You Should Know

Buying and selling real estate often involves transitional periods that require financing to cover costs between transactions. Two common short-term financing options are bridge loans and hard money loans. While they share some similarities, there are important differences between these loans that borrowers should understand. In this article, we’ll compare bridge loans and hard money loans so you can determine which better fits your needs when you’re in a real estate transitional period.

What Are Bridge Loans?

A bridge loan also known as a swing loan is a short-term loan used to cover financing gaps, usually when purchasing one property before selling another. Bridge loans are generally secured by the current home you already own and allow you to access a portion of your home equity for your down payment on the new home.

Bridge loans typically have 6-12 month terms, though some can go up to 3 years. The loans are usually interest-only or deferred interest until they mature. When the term ends the full loan balance must be repaid, often through proceeds from selling your old home. Bridge loans can be used for down payments covering monthly mortgage payments, or other transition costs.

Bridge loans are offered by banks, credit unions, mortgage lenders, and private lenders. Interest rates are higher than traditional mortgages, often 1-3% above prime rate. Fees range from 2-5% of the loan amount. The faster underwriting and funding make bridge loans’ higher costs worthwhile for some borrowers.

Bridge loans require 20% equity in your current home. They also often mandate that you get your new mortgage through the same lender. Credit score requirements start around 600.

What Are Hard Money Loans?

Hard money loans are a type of bridge loan offered by private investors rather than banks or mortgage companies. Also known as private money loans, they are asset-based loans secured by real estate. Hard money loans are used to fund transitions in real estate investments and renovations.

Hard money loans typically have 6-18 month terms with higher interest rates and fees than conventional loans. Rates often start around 8% and fees around 5%. Hard money lenders focus more on the property’s value rather than the borrower’s creditworthiness.

Hard money loans can fund up to 65-75% of a property’s value. Requirements are flexible, with credit scores as low as 500 accepted. Hard money loans fund faster than bank loans, in days rather than weeks or months. Speed and flexibility come at a price.

These non-traditional loans serve borrowers who don’t qualify for conventional mortgages or need funds quickly for real estate deals. Hard money lending is riskier than conventional lending, so costs are higher.

Key Differences Between Bridge Loans and Hard Money Loans

Now that we’ve explained what both are, let’s compare bridge loans vs hard money loans across some key categories:

Purpose

• Bridge loans allow homeowners to buy another property before selling their current home. They bridge the gap between transactions.

• Hard money loans provide quick financing for real estate investors and renovations. They enable deals that don’t qualify for conventional loans.

Borrowers

• Bridge loans serve homeowners transitioning between residences.

• Hard money loans serve real estate investors and rehabbers, especially flippers.

Lenders

• Bridge loans come from banks, credit unions, and mortgage lenders.

• Hard money lenders are private investors, not traditional financial institutions.

Interest Rates

• Bridge loans have rates 1-5% above prime rate, such as 8-12%.

• Hard money loans have higher rates around 8-14% or more.

Loan Fees

• Bridge loans have 2-5% origination fees.

• Hard money loans have origination fees around 5%.

Loan Amounts

• Bridge loans are for smaller amounts, tens or hundreds of thousands.

• Hard money loans fund deals from $100,000 into the millions.

Credit Requirements

• Bridge loans require credit scores around 600+.

• Hard money loans accept credit scores around 500+.

Collateral

• Bridge loans use your current home as collateral.

• Hard money loans use the investment property itself as collateral.

Loan-to-Value (LTV)

• Bridge loans go up to 80% LTV typically.

• Hard money is more flexible, up to 75% LTV often.

Repayment

• Bridge loans are repaid by selling your old home usually.

• Hard money loans are repaid through the property’s cash flow or resale.

Funding Speed

• Bridge loans fund in 2-4 weeks typically.

• Hard money loans fund in days or weeks.

As this comparison shows, hard money loans suit real estate investors who prize speed and flexibility. Bridge loans fit homeowners transitioning between residences with good timing. Evaluate your specific situation to choose the right loan for your needs.

When Do You Need a Bridge Loan?

Bridge loans can provide critical funds when you’re between homes. Common situations where bridge loans are helpful include:

• The buyer of your old home needs to close before you’ve closed on the new home.

• You’ve made an offer on a new home but need to access your current home equity for the down payment.

• You don’t want to put a financing contingency on your new home offer requiring the sale of your existing property.

• You need to pay two mortgages temporarily during the transition between homes.

• You have to relocate quickly for a new job and need to buy before listing your current home.

• You found a great deal on a new home in a seller’s market and want to make a competitive, non-contingent offer.

Essentially, anytime you need funds to close on a new home before selling your old one, a bridge loan can provide a solution. Just be aware of the costs and risks involved.

When Do You Need a Hard Money Loan?

Hard money loans fill needs for real estate investors that conventional mortgages can’t. Typical situations where hard money loans are useful include:

• You found a great off-market real estate deal and want to jump on it quickly.

• You need to buy an investment property with only a small down payment.

• You want to refinance out of an existing loan into more favorable terms.

• You have a property that needs extensive renovations or repairs before selling.

• You want to flip a property quickly, buying rehabilitation projects at a discount.

• Your credit score or income makes getting approved for a conventional loan difficult.

• You need flexible terms due to the property’s condition and your exit strategy.

Hard money gives real estate investors the speed and flexibility to capitalize on time-sensitive opportunities and projects. Just weigh the costs versus the potential profit.

Pros and Cons of Bridge Loans

Bridge loans offer advantages but also pose some risks to understand upfront.

Pros

• Access to fast financing for transitional periods between homes

• No need to put financing contingencies on offers for new purchases

• Allows you to buy before selling your existing property

• Flexible terms tailored to your circumstances

• Lower requirements than conventional mortgages

Cons

• Higher interest rates and fees than other financing options

• Existing home put at risk if new home purchase falls through

• Loan balance due in full at end of short term

• Potential foreclosure if sale of old home delayed significantly

• Often requires using same lender for new mortgage

Bridge loans provide flexible financing when you need funds quickly between real estate transactions. But they come at a price, with stricter terms and repayment requirements than conventional mortgages.

Pros and Cons of Hard Money Loans

Hard money loans also come with pluses and minuses to weigh:

Pros

• Fast access to financing for real estate investments

• Qualify with lower credit scores and higher LTVs than conventional loans

• Flexible terms according to your exit strategy and asset

• Lenders care more about the property than your creditworthiness and income

• No restrictions on loan use like owner-occupancy

Cons

• Higher interest rates and fees than conventional mortgages

• Lenders can foreclose if loan terms aren’t met

• Repaid only through property sale or refinance typically

• Lack of protections like with regulated lenders

• Loan characteristics depend heavily on lender’s criteria

Hard money loans provide easy access to capital for real estate deals. But you pay more for that access and have fewer protections than conventional lending.

Tips for Getting a Bridge or Hard Money Loan

If you’ve decided a bridge or hard money loan is the right move for your circumstances, here are tips to get the best terms:

• Shop around with multiple lenders to compare rates and fees. Don’t take the first offer.

• Seek references and reviews to find established, reputable lenders.

• Look for lenders who will lend based on the property rather than your finances.

• Ask about prepayment penalties. You don’t want restrictions on early repayment.

• Inquire about any upfront costs you’ll have to cover besides origination fees