You might think you need the bank to get onboard with your next real estate project, but you might find doing business with a private money lender easier. While banks offer great traditional mortgages, many private lenders offer a short-term alternative called a hard money loan. Also referred to as bridge loans, this financial product provides a useful funding mechanism for real estate projects.
Hard Money/Bridge Loans Defined
Bridge loans or hard money loans provide a one- to three-year loan to fund restoration, renovation or purchase of real estate. Commonly used for investment properties, they got the name bridge loans because they help the investor “bridge the gap” from their purchase to resale of the property.
Common Uses of Hard Money Loans
The hard money loan quickly puts cold, hard cash in the hands of real estate investors for projects including:
- renovations to flip a house,
- renovations to a rental property,
- purchase and transfer/resale of real estate,
- to bid and purchase with cash at real estate auction.
Private lenders extend bridge loans for purchase or renovation of single family or a multi-unit dwellings.
Since hard money lenders loan for both projects in good or poor condition, they use multiple valuation methods. For homes in poor condition, they use its after-rehab-value (ARV). For homes in good condition, they use its loan-to-value (LTV). The LTV is similar to the a conventional mortgage calculation.
Differences Between Traditional Mortgages
A traditional mortgage has more stringent requirements than a bridge loan. Traditional mortgages require a credit score of 650, for example. A hard money loan requires a credit score of 550.
A mortgage offers a slightly lower interest rate than a bridge loan, but requires more paperwork and a more lengthy approval time. A bridge loan offers an interest rate from seven to 12 percent. The loan disbursement fee ranges from one to 10 percent.
Many real estate investors can’t obtain another traditional mortgage. Banks limit the number of mortgages issued to a single person or entity at four to 10, depending on the financial institution. A hard money loan lets the investor fund their project so they can renovate and sell it or refinance it. The bridge loan offers interest-only payments for the life of the loan.
Bridge loans also let an investor purchase a damaged property. Banks generally want to extend mortgages only on homes in good condition. This makes the bridge loan ideal for those involved in-house flipping.
Hard Money Loans in California
In California, you can obtain a hard money loan from a private lender. Think of private lenders as venture capitalists who loan rather than invest. In CA, the loan time period usually ranges from six to 12 months, according to Delancey Street, a private lender with locations in Los Angeles and Stockton. In California, private lenders require collateral for a loan. Qualifying items vary by lender.
General Hard Money Loan Requirements
Although easier to obtain than traditional mortgages, hard money loans still have requirements. You’ll need a:
- minimum credit score of 550,
- two or three months of bank statements,
- the property location,
- the property’s purchase price,
- resume of real estate experience,
- purchase contract,
- contractor bids,
- rehab scope of work.
A bridge loan from a private lender can help a real estate investor obtain a quick loan to move on a property. It provides renovation funding for fix and flip projects. In summary, a hard money or bridge loan offers:
- a pre-qualifying application
- a quick lender response,
- fast funding,
- simpler borrower requirements,
- interest-only payments,
- short loan terms of six months to three years.