‘Hard money’ and ‘bridge loans’ are two terms often heard in real estate circles. Moreover, the two terms are used interchangeably. That’s okay because, following the 2008 housing crash, bridge loans for primary residences became extremely difficult to get. That reality wiped out what used to be the biggest difference between the two types of loans.
Technically speaking, bridge loans can be hard money loans. However, they don’t have to be. Banks can still make bridge loans under certain circumstances, and sometimes they do. But in the real estate game, the difference between the two is purely semantic.
The Hard Money Loan
Let us start with the basic definition of a hard money loan. A hard money loan is a loan made by a private lender based on the borrower’s assets. Hard assets are required as collateral to back these loans, which is where the name comes from.
In an asset-based lending situation, the lender doesn’t care so much about the borrower’s credit history, credit score, employment, etc. Of concern is the collateral being offered. It needs to have enough value to cover the cost of the loan and any expected expenses related to disposing of the asset in the event of default.
Purposes for Hard Money
These days, hard money loans are used primarily for one of four purposes. The first is real estate investment. Actium Partners, a hard money firm located in Salt Lake City, UT, says the lion’s share of hard money loans in the modern era fund real estate acquisition. The other three possibilities are:
- Business expansion
- Mergers and acquisitions
- Debt restructuring.
In a debt restructuring scenario, a borrower might apply for a hard money loan to pay off another credit instrument. Afterward, a more traditional line of credit is established to pay the hard money loan.
The Bridge Loan
The bridge loan is so named because it is intended to bridge the gap between a current financial need and an expected source of future income. Prior to the 2008 housing crash, it was fairly easy for home buyers to facilitate the purchase of a new home by way of a bridge loan. The bridge loan would cover the purchase with the understanding that it would be repaid as soon as the borrower’s current home sold.
Bridge loans for such transactions are much more difficult to come by due to tighter credit restrictions put in place in 2012. Do banks still make bridge loans? In limited circumstances, yes. But they are not handing out bridge loans as easily today as they were two decades ago.
When a hard money lender offers a bridge loan, the funding does the same thing. It bridges the gap between immediate financial need and future revenue. But hard money lenders generally don’t bother making a distinction. It is all hard money for them. Whether the money will be used to acquire a piece of real estate or bridge a gap in the borrower’s cash flow doesn’t matter.
Get in and Get Back out
One of the signatures of both hard money and bridge loans is the lender’s desire to get in and get back out as quickly as possible. Both types of loans are short-term loans by nature. Hard money loans are generally for one or two years. Bridge loans can be offered with terms as little as six months.
In the real estate game, the differences between hard money and bridge loans are merely semantic. They are one in the same. Banks rarely make bridge loans these days, but hard money lenders are happy to do both.