Hard money loans vs. peer financing

Can you tell the difference between hard money bridge loans and peer to peer loans? If you are considering one or the other, there are some differences you should understand.

First of all, the major difference is that hard money loans are 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 more interested in the high rate of return. Their security comes from the fact that they can foreclose on the piece of property if the borrower can’t continue making payments.

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

Let’s cover the bridge loan aspect of this. A bridge loan is a short term loan that is designed to fill the gap between the purchase (or need for capital, as the case may be) and the availability of conventional financing. Most conventional financing sources (underwriters/loan investors) require a seasoning period before they will allow a property to be refinanced.

For example, let’s say an foreclosure investor has the chance to buy a property at far below market value, but the property needs 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 loan may be secured which would give the real estate buyer time to make necessary repairs during the “seasoning period.” 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 complete the transaction.

Lastly, peer to peer financing is simply business or real estate loans made from one private party to another, usually not secured by real property. In a typical scenario, a business owner gets a big order, but doesn’t have the money to purchase the needed raw materials to complete the order. So he goes to a private investor who knows his business and has money to lend. Peer to peer lending of this nature is increasingly becoming popular due to tightening credit markets.