Hard money and bridge loans can provide numerous advantages to successful real estate investors. Learn about some of the most common ways they can help.

Hard money loans and bridge loans can be an excellent source of quick and flexible financing for real estate investors. More traditional forms of financing are often not available in certain situations or for certain purposes. The property might not meet the standards set by Fannie Mae or Freddie Mac, for example, or you might need financing faster than a large bank can manage. Private lenders, including hard money lenders and bridge lenders, can often step in to cover an investor’s financing needs. Read on to learn more about when to get a hard money loan or bridge loan.

Differences between bridge loans and hard money loans

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First off, it is useful to understand the difference between a hard money loan and a bridge loan. These types of loans have some overlap in features and purpose, such as:

Flexibility: Lenders are often able to create loans that fit borrowers’ particular circumstances. This might involve flexible repayment terms, such as allowing interest-only payments for much of the loan term.
Short loan terms: Both types of loans tend to have brief loan terms, often measured in months rather than years.
Collateral: The value of the property securing the loan typically serves as the basis for the loan, as opposed to other factors like credit history. This can speed up the closing process.

The two types of loans also have some important differences:

Loan source: Both traditional and private lenders may offer bridge loans, but hard money loans exclusively come from private lenders.
Stability and value: Bridge loans are often best for established properties that need short-term financing until the borrower can close on longer-term financing. Hard money loans are often better suited to situations when a property could have substantial value but needs work to get to that point, such as a rehabilitation or fix-and-flip project.

Reasons to get a bridge loan or hard money loan

The following are common reasons real estate investors, developers, builders, and others might seek a hard money loan or bridge loan.

1. You are waiting to sell a property and need financing to purchase a new property.

Bridge loans serve an important purpose when you need money for something soon, but will not have enough cash on hand until a different loan closes. This is the origin of the term “bridge loan,” because it provides a bridge to a point in the future when you will have access to the money you need.

Real estate investors may use bridge loans or hard money loans when they find a good investment property before they have sold an earlier one. They need the money from the sale to put toward to new one. If they wait for the sale to close, they might lose the new opportunity. A hard money or bridge loan can cover what they need to buy the new property.

2. You want to use the equity in an investment property to improve or renovate that property or purchase a new property.

Home equity loans are subject to a rather significant amount of regulations. As a result, they are not available for commercial properties and many residential investment properties. Hard money lenders, however, can provide financing based on equity in an existing investment property

3. You need a quick closing.

Traditional financing can be a slow process. Lenders are subject to regulations by government agencies and further restrictions by organizations like Fannie Mae. They may also have very complicated underwriting procedures. These factors can combine to slow the process down.

Sometimes, an investor needs to be able to close on a loan quickly. This could be because of a time-limited opportunity for a new investment, like in the situations described in #1 above. It could also involve a situation where an investor has contractual obligations that will not wait for a traditional loan to close, or they risk losing deposits if they have to wait for all the traditional gears to turn. Hard money lenders are not subject to many of those regulations and requirements. They can move much faster as a result.

4. You are buying a property that is in poor condition but has substantial after-repair value.

Traditional lenders look at numerous factors, including the value of the property that will be securing the loan. If the property’s current value is low, a lender is not likely to approve a loan in any significant amount.

Hard money lenders do not just look at the property’s value at the present moment. They also look at the borrower’s proposed project, and what the property is likely to be worth when the borrower has finished their work. This amount, known as the after-repair value (ARV), is a major factor in hard money lenders’ review of loan applications. They consider a property’s potential, not just its current state.

5. You are buying a new or non-warrantable condominium.

Some condominium units are not eligible for many forms of traditional real estate financing for various reasons. Fannie Mae and Freddie Mac rules require a condo unit to be “warrantable” before a lender may make a conventional mortgage loan. Their rules regarding warrantability can be complicated.

A condo could be non-warrantable because it has too few owner-occupied neighbors, a single entity owns too many units in the complex or building, or the condominium owners’ association is involved in litigation. Hard money lenders are much less concerned about warrantability.

6. You need more financing than is available through more traditional funding routes.

Conventional real estate loans are subject to upper limits by Fannie Mae and Freddie Mac. Even jumbo mortgages may have limits. Hard money lenders may be able, in the right circumstances, to issue “super jumbo financing.” This often refers to loans in excess of $2 million or more.

7. You are purchasing land while waiting for a construction loan to close.

Much like in #1 above, many forms of traditional financing are not helpful when a borrower just needs something to help them get through a stretch while they wait for a longer-term loan to close. Developers, builders, and investors might need to make purchases during the period when they must wait for a construction loan to close. A bridge loan or hard money can help.

8. You are a foreign national with little or no financial history in the U.S.

Qualifying for a conventional mortgage and many other types of traditional financing requires a deep dive into a borrower’s financial history. The U.S. has developed an extensive system for documenting these histories, including credit scores and credit reports. Laws like the Fair Credit Reporting Act govern the collection, reporting, and use of credit history and other data.

Some other countries have systems that are similar to credit scores in the U.S., but they are not necessarily compatible. This can make it difficult for foreign nationals with minimal financial history in this country to qualify for many types of loans. Hard money lenders are far less concerned with credit history. They look at the property more than the borrower.

Learn more about hard money loans with Capstone Capital Partners

The hard money lenders at Capstone Capital Partners provide Texas real estate investors with fast, flexible financing for many types of residential and commercial projects. We can evaluate your project and help you obtain the right kind of funding. Applying is easy, so contact us today to get started on a free pre-approval.

Why Do Successful Investors Use Hard Money / Bridge Loans?