The difference between hard money and peer loans
Do you understand the difference between hard money bridge loans and peer to peer loans? If you are considering either loan type or both, there are some distinctions you should understand.
First, hard money loans are secured by real property using a low Loan to Value (LTV) ratio and a high interest rate. A borrower’s credit history really doesn’t matter, because they are after the high rate of return. The safety of their capital comes from the fact that they can foreclose on the piece of property if the borrower doesn’t make the payments.
For them, the loan is actually pretty safe, because the LTV is not only low-balled (60 to 70% max LTV, typically), but the value of the property itself is low-balled using a price that is considered by the investor to be the “quick sale value.” This means the underwriter can in most cases get his money back in fairly short order in the event of default.
Now, let’s deal with the bridge loan aspect of this. 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 securing of traditional finances. Most underwriters require a seasoning period before they will allow a property to be refinanced.
For example, let’s suppose an land 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. When conventional lenders will not loan money for the deal because of the condition of the property, a hard money bridge loan may be secured which would offer the property buyer time to make needed repairs. Then the hard money loan could be refinanced using conventional financing 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 close the deal.
Lastly, peer to peer lending is simply business or real estate loans made from one private party to another, and usually unsecured. For instance, a business person gets a big order, but doesn’t have the capital to purchase the needed raw materials to complete the order. So he goes to a business associate who understands his business and has money to lend. Peer to peer lending of this nature is increasingly becoming popular due to tightening credit markets.
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