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What Is a Hard Money Bridge Loan?

Written by Harry

A Hard Money Bridge Loan is a type of loan that is issued by a Hard Money Lender. It’s a private company or investment pool instead of a conventional bank. You may have heard about Hard Money loans because of their increasing popularity in the fix and flip housing market.  The most common situation it is used under is residential and commercial real estate transactions.

Didn’t know that money could be hard?  The term hard money comes from the idea that there is an actual hard value behind the loan.

Generally, it does not exceed 85 percent of the residential property value and 65 percent for commercial properties. Hard Money Bridge Loans typically having higher interest rates and shorter pay-off time periods.

What Purpose Does it Serve?

Are you contemplating a bridge of hard money right about now and wondering what it could possibly be used for? Allow me to give you the scoop. Bridge loans are used as a stop-gap for certain situations and is then repaid shortly after. Common loan terms are 12 months to 36 months.

Imagine this, you’ve found a house that needs some fixing and intend to flip it for a big profit. You go to the bank and get a big fat no, its too big of a risk. That’s where a Hard Money Lender comes in and offers a bridge loan against the value of the property.

You spend 6 months renovating and turn a nice chunk of change for your efforts. The loan is repaid with money from the sale.  You wouldn’t be the first one, flipping houses is now a $56 billion market and private or hard money lenders have plenty of hands in this cookie jar.

How it Can Help You?

“Money is a guarantee that we may have what we want in the future. Though we need nothing at the moment it insures the possibility of satisfying a new desire when it arises.” -Aristotle

Bridge Loans can be helpful for residential property owners as well as property investors. Sometimes a family may be selling their home with the intention of using the funds to purchase a new home.

If a hiccup occurs and the timing isn’t just right a family could find themselves missing the opportunity to purchase their dream home. A hard money bridge loan can fill a need until the old home is sold.

In certain situations, money is needed before permits have been finalized. A conventional bank won’t issue a loan until the ink has dried on permits. So how does a developer get started without any capital?

Getting a hard money bridge loan offers developers the chance to get the funds they need now and pay it back after a loan with lower interest through the bank becomes available.

Real estate isn’t the only customer of the hard money bridge loan, businesses that loose major investing partners take advantage too. If a stockholder pulls out their investment and the company faces certain death, a bridge loan replaces the lost funds and is paid back when a new shareholder comes into the fold.

Don’t Get Scammed

Be on the lookout for predatory lenders, while many Hard Money Lenders are honest and true there are still some bad apples in the bunch. USA.gov offers some helpful tips to protect yourself.

Some easy to spot red flags are lenders who offer to pay more than the property is worth, hoping that the loan will go unpaid so that they can reclaim the property.

Interest rates that are too low will generally be accompanied by unexpected fees to lure you into choosing their lending firm over others with higher interest rates. That firm turns a profit with undisclosed expenses. Keep your eyes peeled for firms that seek a loan insurance fee upfront or demand it in a strange payment method.

A general rule of thumb is no cash upfront, the majority of the fees will be processed at the closing of the loan terms through a title agency. Always question a lender who asks for money upfront for a loan insurance fee, these should be paid to the loan insurance company directly.

Lastly, vet your lender, cross-reference phone numbers with known scams. Speak with someone over the phone, visit the office or get a reference from trusted reviews or friends.

Sources:

https://www.forbes.com/sites/forbesrealestatecouncil/2017/12/05/how-the-rise-of-private-lending-is-reshaping-the-mortgage-market/#5a8a750552ae

https://www.attomdata.com/news/heat-maps/2016-year-end-u-s-home-flipping-report/

https://www.usa.gov/mortgages#item-36897

 

 

About the author

Harry