Hard Money Can Be Used as a Bridge Loan – It Often Is!
Hard money and bridge loans are technically separate things. Hard money always comes from private lenders whereas bridge loans can come from both private and traditional lenders. Likewise, hard money loans almost always go toward real estate transactions while bridge loans can be used for any number of purposes. But here is the interesting thing: hard money can be used as a bridge loan. It often is.
Differences Between the Two
If you are confused, there is no need to be. Let us look at the two types of loans in more detail. Beginning with the hard money loan, it gets its name from the fact that it is backed by a hard asset – usually real estate. When a real estate investor hits up Salt Lake City’s Actium Partners for a loan to purchase a new piece of property, said property backs the loan as collateral.
A bridge loan may or may not be backed by a hard asset. The bridge loan gets its name from its purpose: to bridge the gap between an immediate funding need and a future source of income. Bridge loans are often used to fund real estate transactions in the short term, but they do not have to be. There are other purposes for a bridge loan.
Both Are Short Term
The one thing hard money and bridge loans have in common is their short-term nature. Actium Partners says that typical hard money loans offer terms of 24 months or less. Bridge loans can be much shorter and often are. A six-month bridge loan is not out of the ordinary.
Lenders prefer to keep hard money and bridge loans as short as possible in order to minimize their own risk. The shorter the term, the quicker lenders can get out. Short terms are a means of protecting themselves. But with the short terms come higher interest rates.
Hard Money as a Bridge Loan
Getting back to the main point of this post, it is possible to utilize hard money as a bridge loan. Once again, we look to Actium Partners and a deal they funded on a multi-unit apartment property. The buyer originally had a bank lined up, but the bank backed out at the last minute. No worries. Actium came in and provided funding to close the deal on time.
After closing, the client was able to arrange a traditional loan based on the value of the property and the amount of rent it was generating. The traditional loan paid off the Actium hard money loan. In essence, Actium’s funding provided a bridge between property acquisition and obtaining a bank loan.
Rare for Residential Property
Another interesting aspect of the bridge loan is its relative rarity. Although bridge loans are pretty common for commercial real estate transactions, they are rare in the residential market. Things used to be different prior to the 2007/2008 housing crash and subsequent financial crisis. From the late 1990s to the mid-2000s, bridge loans for residential properties were pretty standard fare.
Post-crash banking regulations and a natural reluctance among lenders brought an end to bridge loans for residential properties. To get one from a traditional lender these days is nothing short of a miracle. But in the hard money game, bridge longs are much more common.
A hard money loan can be used as a bridge loan even though the two types of loans are technically different. If combining the two helps you meet your financial goals, perhaps it would be fair for you to argue that the differences are merely semantic.
