Hard Money vs. Peer Loans

Do you know the difference between hard money bridge loans and peer to peer loans? If you are thinking about either loan type or both, there are some important differences you really must understand.

First of all, the major difference is that hard money loans are secured by a piece of property using a low Loan to Value (LTV) ratio (and often a high interest rate). A borrower’s credit history really doesn’t matterto hard money investors, because they are focused on the high rate of return. The safety of their capital comes from the fact that they are able to foreclose on the real estate in the event the borrower flakes out on the payments.

For them, the loan is actually pretty safe, due to the fact that the LTV is not only low-balled (60 to 70% max LTV, generally), but the value of the property itself is low-balled using a price that is deemed by the investor to be the “quick sale price.” This means the lender can in most cases get his capital back in a relatively short time in case of default.

Let’s take a look at the bridge loan aspect of this. A bridge loan is by definition a short term loan that is designed to fill the gap between the purchase and the availability of conventional sources of funds. Most conventional financing sources (underwriters/loan investors) require a seasoning period from the time of purchase before they will allow a property to be refinanced.

Let’s say an property investor has the chance to buy a property at below it’s true market value, but the property is going to require a lot of fix-it work. If a conventional lender will not loan money for the deal because of the condition of the property, a hard money bridge loan may be secured which would give the real estate buyer the time necessary to make needed repairs during the “seasoning period.” Later, the hard money loan would be refinanced conventionally at a lower rate. Often, fast hard money loans are available so you don’t have to wait forever to close the deal.

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. For instance, a business owner gets a big order, but doesn’t have the capital to buy the needed raw materials to fulfill the order. So he goes to a business associate who knows his business and has some capital to lend. He is resorting to peer to peer lending in this case to get the deal done.

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