Hard Money vs. Peer Loans

Do you know the difference between hard money bridge loans and peer to peer loans? If you are contemplating either loan type or both, there are some differences you should understand.

First of all, the major difference is that hard money loans are usually collateralized by a piece of property using a low Loan to Value (LTV) ratio (and often a high interest rate). A borrower’s credit score really doesn’t matterto most lenders, because they are after the high rate of return. Their security comes from the fact that they can foreclose on the real estate if the borrower defaults.

The loan is doubly safe for them, due to the fact that the LTV is not only low-balled (60 to 70% max, generally), but the value itself is low-balled using a price that is considered by the investor to be the “quick sale price.” This means the hard money lender can in most cases get his money back in a short time in case of default.

Let’s cover the bridge loan aspect of it. A bridge loan is a short term loan that is designed to fill the gap between the purchase and the securing of a conventional loan. Most underwriters require a seasoning period from the time of purchase before they will refinance a property.

Let’s say an foreclosure investor has the opportunity to buy a property at far below it’s true market value, but the property needs a lot of work. will not loan money for the deal because of the condition of the property, a hard money loan may be secured which would give the real estate buyer time to make needed repairs. Then the hard money loan would be refinanced using conventional financing at a lower rate. Often, fast hard money loans are available so you don’t have to wait forever to complete the transaction.

Lastly, peer to peer lending is simply business or real estate loans made between private parties, usually unsecured. For instance, a business owner gets a big order, but doesn’t have the capital to purchase the raw materials to complete the order. So he goes to a peer lender who knows his business and has some capital to lend. He is resorting to peer to peer lending in this case to get the deal done.

Filed Under: Planet Mushroom Contributors