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Hard Money vs. Peer Loans

Posted June 16th, 2010 by admin

Do you know the difference between hard money bridge loans and peer to peer loans? If you’re considering either one, there are some important differences you should understand.

First of all, hard money loans are usually collateralized by real property using a low Loan to Value (LTV) ratio (and often a high interest rate). A borrower’s credit score really doesn’t matterto hard money investors, because they are more interested in the high rate of return. The safety of their investment comes from the fact that they are able to foreclose on the property if the borrower can’t continue making payments.

The loan is actually pretty safe for them, due to the fact that 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 believed by the investor to be the “quick sale value.” This means the investor can theoretically get his or her capital back in fairly short order in the event of default.

Now, let’s take a look at the bridge loan aspect of hard money bridge loans. A bridge loan is 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 availability of traditional finances. Most conventional financing sources (underwriters/loan investors) require a seasoning period from the time of purchase before they will write a new loan on a property.

Suppose an property investor has the chance to buy a property severely under it’s true market value, but the property is going to require a lot of fix-it work. If a conventional lender will not loan money because of the condition of the property, a hard money bridge loan may be secured which would give the property buyer time to make necessary repairs during the “seasoning period.” Then the hard money loan would 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 forever to complete the transaction.

Lastly, peer to peer financing is simply business or real estate loans made from one private party to another, and usually not secured by real property. For instance, a business owner gets a big order, but perhaps does not 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 money to lend. He is resorting to peer to peer lending in this case to get the deal done.

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