Do you understand the difference between hard money bridge loans and peer to peer loans? If you are considering either loan type or both, there are some important differences you really must understand.
First, the major difference is that hard money loans are collateralized by a piece of property using a low Loan to Value (LTV) ratio and a high interest rate. A borrower’s credit history really doesn’t matterto most lenders, because they are more interested in the high rate of return. The safety of their capital comes from the fact that they can foreclose on the piece of property if the borrower happens to default.
For them, the loan is actually pretty safe, because the LTV is not only low-balled (60 to 70% max LTV, generally), but the value of the property itself is low-balled using a value that is considered by the investor to be the “quick sale price.” This means the hard money lender can usually get his or her money back in a short time in the event of default.
Now, let’s take a look at the bridge loan aspect of it. A bridge loan is by definition 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 conventional sources of funds. Most loan underwriters require a seasoning period before they will allow a property to be refinanced.
Let’s say an property investor has the opportunity to purchase a property severely under it’s true market value, but the property needs a lot of work. If a conventional lender will not loan money because of the condition of the property, a hard money loan may be secured which would give the real estate buyer time to make necessary repairs. Later, the hard money loan could be refinanced conventionally at a lower rate. If you know where to look, fast hard money loans are available so you don’t have to wait a long time to complete the transaction.
Lastly, peer to peer loans are simply business or real estate loans made between private parties, usually unsecured. For instance, a business owner gets a big order, but perhaps does not have the capital to buy the needed raw materials to fulfill the order. So he goes to a peer lender who understands his business and has money to lend. He is resorting to peer to peer lending in this case to get the deal done.
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