Differences Between Hard Money Loans and Bridge Loans

Differences Between Hard Money Loans and Bridge Loans

Hard money loans and bridge loans are two quick, popular financing options for real estate investors. Both loan types are short-term and are secured by mortgage assets. However, some key differences make them suitable for different situations.

This guide will compare hard money loans and bridge loans. It will discuss their benefits and help you choose the right solution.

What are hard money loans?

Hard money loans are based on asset collateral value, often in real estate. These loans are not focused on borrowers’ creditworthiness. They are a good option for real estate investors who need quick assistance with poor credit or high debt.

Benefits of hard money lending:

Speedy Approval: Hard money loans offer funding within days, thanks to a streamlined process. This is ideal for time-sensitive deals and investment strategies that must act quickly.

Flexible Terms: Enjoy greater flexibility than traditional loans, including loan duration, repayment options, and credit requirements.

Diverse Borrowers: Hard money lenders are more open to low-credit or nontraditional borrowers.

Portfolio Diversification: Hard money loans can diversify an investor’s real estate portfolio. They allow the use of equity in existing properties to fund new acquisitions.

What are bridge loans?

Bridge loans offer short financing that “bridges the gap” between two transactions. Real estate investors often use them to buy a new property before selling their existing one.

The borrower’s property usually secures bridge loans. They are repaid when the existing property is sold. Bridge loans are also known as: “swing loans” or “gap financing.”

Benefits of bridge loans:

Purchase Before You Sell: It allows you to buy a new property before selling your existing one.

Quick Closing: Bridge loans can often be closed quickly, similar to hard money loans.

Flexibility: Bridge loans have flexible repayment terms. It can be structured to meet the borrower’s needs.

Interest-Only Payments: Some bridge loans allow for interest-only payments. This can help with cash flow.

Avoid Contingencies: This can help you make a non-contingent offer on a new property.

Differences Between Bridge Loans and Hard Money Loans

Differences between the two lending options are:

Metric

Bridge Loans

Hard Money Loans

Purpose

Used for timing gaps in real estate deals.

Used for investments, fix-and-flip.

Collateral Focus

Considers credit and property value.

Primarily based on property value.

Interest Rates

Lower interest rate than hard money

Higher (8 - 15%)

Loan Term

6 - 12 months

6 -24 months

Lenders

Banks or bridge loan specialists

Private lenders or firms

Flexibility

Moderate; some borrower qualifications are required.

High, less concern for borrower credit scores.

Similarities Between Bridge Loans and Hard Money Loans

Here’s a breakdown of their common features:

  • Higher interest rates than traditional loans are due to shorter loan terms and high risk for lenders.
  • Hard money and bridge lenders offer fast approval. They focus on the collateral property’s value.
  • Both loans are usually short-term, typically ranging from a few months to a few years.

Which loans are best for you?

Which option should you choose, a bridge or a hard money loan? It depends on your needs; here’s a guide to help you decide:

Consider a bridge loan if:

You need to quickly purchase a new property before selling your current one.

You have a good credit score and a manageable debt-to-income ratio (DTI).

You want a faster closing process than a traditional mortgage.

You’re comfortable with higher interest rates and potential origination fees than traditional mortgages.

Consider a hard money loan if:

Speed is your top priority, and you need to close quickly.

Your primary concern is the property’s value, and you may have credit challenges.

You’re comfortable with higher interest rates for a short-term financing solution.

You’re working on a fix-and-flip project or other real estate investments that may not qualify for traditional loans.

Additional Factors to Consider:

Loan-to-value ratio (LTV): Both bridge and hard money loans will limit LTV. This will affect the loan amount you can secure.

Equity position: Your equity can help secure a bridge loan.

Investment strategy: Align your loan choice with your overall investment goals and timeline.

Financial situation: Assess your current financial strength and ability to repay the loan.

Ultimately, your best loan depends on your needs and risk tolerance. Carefully weigh the pros and cons of each option to make an informed decision.

Frequently Asked Questions

How do I qualify for a hard money loan as a rental property investor?

Lenders primarily focus on the property’s value and your ability to repay. Expect to provide a strong down payment (often 25 – 35%), proof of income, and a detailed investment plan.

What are the typical rates and fees associated with bridge loans for flippers?

Interest rates depend on the loan term, LTV, and your experience. They can range from 7.75% to 12% or higher. Expect fees like origination fees, appraisal fees, and potentially prepayment penalties.

Can I use a bridge loan to finance the renovation costs of a flip property?

Some bridge loans include renovation financing. It lets you borrow against the property’s after-repair value (ARV). This streamlines the funding process for flippers.

What exit strategies should I consider when using a hard money loan for a rental property?

Common exit strategies include refinancing with a conventional loan once the property is stabilized and selling the property at a profit.

Publish: December 23, 2024 | Last Update: February 5, 2025
Sandy Yuen

Sandy Yuen is a certified mortgage broker. In 20 years of hard money lending, she’s funded over $450 million for investors. She specializes in fix-and-flip, bridge, and construction loans.

She also funds projects like second homes, apartments, and commercial and shopping centers. Sandy, a trusted lender, served over 500 clients in Irvine, CA. She is known for her fast approvals, flexible rates, and high transparency.

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