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FREQUENTLY ASKED QUESTIONS
The short answer is that these two terms are often used interchangeably, but there are actually differences in the details.
Both loans are short-term, primarily used for real estate investments, and have similarly flexible repayment terms. However, a bridge loan can be funded by either private or institutional lenders, can be secured by assets and/or equity, and has stricter guidelines for how the funds can be used. In contrast, a hard money loan is only funded privately, is secured only by the “hard” real estate asset itself, and can be used for nearly any purpose the lender approves.
These differences mean that a bridge loan can also be a hard money loan, and a hard money loan can also be a bridge loan, but not all hard money loans are bridge loans, and not all bridge loans are hard money loans.
Confused yet? 🙂
The biggest difference boils down to the information they use to make their lending decisions. Institutional lenders are typically “hard equity lenders”, meaning they make their lending decisions based largely on the property itself. Alternatively, private lenders make their lending decisions based on whatever factors they see fit, including nearly any aspect of your life, any component of the investment project, or a combination of both.
As such, private lenders tend to operate as “relationship lenders”, because their relationship with the borrower often factors into their decision. Essentially, private lenders have the freedom to choose to lend their money to whomever they want, but they typically make their decisions based on indicators like the borrower’s experience, income, capital, credit, and other personal or professional credentials, while also factoring the property into consideration as well.
These two very different methods of determining “worthy” borrowers result in other key differences as well. Most institutional lenders require inspections, surveys, and appraisals, because they are using the property as their deciding factor. These additional steps are costly, but they are also time-consuming and can cause a myriad of problems in a real estate investment transaction.
Further differences could be seen as part of the overall borrowing experience; a borrower will never get the chance to negotiate with the true decision-maker of a lending institution, but a borrower can sit face to face with a private lender almost anytime! Plus, even if the transaction goes silky smooth, funding through traditional institutions takes at least 15 days, and most often takes 30 to 45 days. Meanwhile, we can fund a loan in as little as 7 days!
If you’re self-funding your real estate investments, that’s great! You definitely don’t need a hard money lender, but having a good one in your digital rolodex certainly doesn’t hurt. If you plan on continuing to make real estate investments, having a relationship with a good hard money lender is likely to improve your bottom line in many ways.
For starters, having a hard money lender can allow you engage in multiple deals at the same time without tying up all your liquid assets, allowing you to quickly take advantage of favorable opportunities when you come across them. Furthermore, experienced hard money lenders know how to make almost any deal work, so you’ll never have to worry about your deal falling through due to an oversight.
In fact, hard money lenders are even useful after closing, because they just might be the source that leads you to your next lucrative investment!
There’s no correct answer to this question because the word “better” is so subjective. What is “better” for one investor may actually be worse for another, and vice versa.
You don’t want to make the mistake of categorizing lenders as “good” or “bad”. You should always consider all funding options, compare them based on the terms and conditions, and choose the one that suits your situation best. In short: do the math!
For example, if you will be keeping the property for a longer period of time, then choosing an institutional lender could be more financially beneficial for you because they typically have lower interest rates. Alternatively, if your real estate investment purchase is going to be short-term, meaning you intend either to wholesale it immediately, or rehab and sell it quickly, then the terms offered by a private lender may be a better fit for your needs because the higher interest rate is usually outweighed by the expeditious turnaround time and the reduced fees.
But the truth is that both of the prior sentences make huge unfounded assumptions based on generalities and lending norms, and that’s something you should never rely on when you’re deciding which lending solution is best for you.
We actually answered this question in great detail on our blog, so please check out this blog post, titled “How To Choose the Best Private Lender for Hard Money Funding”!
We do not have prepayment penalties. You can pay off your loan at any point during the term of your loan with no penalties at all.
We have absolutely no junk fees or hidden costs. The only fee we charge is a loan origination fee, which is 2% of the loan amount for property flips/cash outs, or 4% of the loan amount on loans for new construction and land/developments.
Our primary goal is for property investors to borrow from us again and again, so shady lending practices are NOT in our best interest! We pride ourselves on clarity, transparency, and communication, so you will never encounter “hidden” costs when working with us. We always provide breakdown of all loan costs, known as a “good faith estimate” after your loan request is approved, so you will always be fully informed.
Thanks to our streamlined process and extensive transaction experience, we regularly close loans in as little as 7 days. Keep in mind that there is always the possibility for closings to be delayed, however this is almost never within our control. Typical closing delays are caused by title issues that need to be cleared up, but there are some other issues or circumstances that can cause closing delays as well.
Our standard document requirement is very simple:
- Loan application
- Credit authorization
- Purchase contract
- Proof of funds for down payment
- Two years of tax returns
- Copy of government-issued ID
We may require additional documents before closing, but this is all that’s required for us to provide you with a loan commitment.
