Hard money bridge loan is a combination of hard money loans and bridge loans. A hard money loan is a kind of loan using which, one may receive money based on the value of a property, usually real estate. Bridge loans, on the other hand, is a short-term loan obtained for a small period of time in order to bridge the gap between two consecutive financings. However, these loans are obtained by pledging a property which is about to be bought or completed as the collateral. Since these loans involve high risk and relatively less documentation, they are not based on how credit worthy the borrower is and usually carry higher interest rates.
Both Bridge and Hard money loans are similar in that they are not offered by standard financial institutions like banks and are secured for short-term, interim purposes. Therefore, these loans tend to overlap very often. Hard money bridge loans can be very useful during acquisitions and buy-outs. Since the transfer of funds happens very fast, the interest rates and fees are usually as high as 12-15% for durations of about 12 months.
The loan is decided based on the quick sale value of the pledged property. The term ‘quick sale value’ refers to the value which can be obtained by selling the property within 4 months and the term ‘real value’ refers to the value of the property on the present day. Hard money bridge loans normally have a lower loan-to-value ratio (50-60% of the quick-sale value) compared to other standard loans.
For example, a company might want to start working on a project while it is still seeking permit. Since they are not entitled to the project, they may obtain a loan from a lender at high interest rates. And as soon as the permit for the project is obtained, they have all necessary documents to secure a loan from a regular financing institution at a lower rate of interest for a longer duration.
Apart from the high interest rates and short terms, there are a few things to be considered before opting for hard money bridge loans. Since these loans are provided by firms which are not regulated state or federal laws, they don’t have a fixed interest rate or term. Therefore, it is wise to know the conditions before signing the dotted line.