When you need financing quickly for a commercial real estate deal, you may consider applying for a hard money loan or a bridge loan. These two types of financing are often mistaken for being the same. However, there are some key differences you should be aware of if you’re considering using these types of asset-based financing. While both loans are short-term, they’re often used for different purposes. We’ve created this guide to help you understand how commercial hard money loans differ from bridge loans so you can choose the best option for your needs.
What Are Commercial Hard Money Loans?
Commercial hard money loans are used to help fund a commercial real estate purchase or a rehab project of a commercial property. You don’t need to have a good credit score to qualify for a hard money loan. Instead, this type of loan requires you to use collateral, such as real estate, to back your funding. The loan amount you can qualify for is based on the value of the property you use to back the loan, unlike a traditional loan that provides funding based on your creditworthiness and financial history.
Typically, investors use commercial hard money loans when they need funding quickly or if they can’t qualify for a traditional loan. You can’t get a hard money loan from a bank or credit union because these lending institutions have strict regulations they must follow when lending money. With a hard money lender, you have more room to negotiate, as these lenders have more flexibility.
What Are Bridge Loans?
A bridge loan is financing that investors use when they need money to cover them while they transition from one loan to another. The funds can bridge the gap between paying off one loan, such as a mortgage, and taking on a new one. Because it can be faster to get approved for a bridge loan, many investors use this type of financing while they wait for a more permanent loan to be approved through a bank. This bridge-to-permanent loan is meant to be short-term, and you can’t use it in place of a regular mortgage.
You can apply for a bridge loan if you’re at risk of losing out on a deal while you wait for a bank to provide loan approval. Once the bank loan goes through, you can use some or all of the funds to pay off the bridge loan.
What Are the Differences Between Commercial Hard Money Loans and Bridge Loans?
Although commercial hard money loans and bridge loans are both short-term financing options, the loans differ in several ways. Read on for more about the differences between these two loans.
Loan Duration
When you take out a commercial hard money loan or a bridge loan, you need to understand the repayment terms. Both loans require you to make regular payments plus interest, but you’ll only have a short time before the lender expects the loan amount to be repaid in full. For a commercial hard money loan, you’ll typically have about a year to repay the debt. A bridge loan can have a repayment term of between six months and three years. These loans do have some flexibility, so you may be able to negotiate your repayment terms with your lender.
Loan Approval Process
Getting approved for a bridge loan or a commercial hard money loan will be much easier and faster than going through the approval process for a bank loan. The approval process for a hard money loan is generally the easiest to get through. Because you’re using collateral, you don’t have to deal with a lot of paperwork that can slow down the approval process. With a bridge loan, you need to prove that you have other financing lined up and you’re only waiting for a bank’s approval. This can make approval for a bridge loan take longer.
Loan Interest Rates
Commercial hard money loans and bridge loans both come with a higher interest rate than traditional bank loans. However, hard money loans are riskier than bridge loans. This means that a commercial hard money loan will have a higher interest rate than a bridge loan. The reason you pay more interest for a commercial hard money loan is that you’re only backing the loan with your collateral. A bridge loan has less risk because you’ve applied for other financing that you can use to pay off the loan once it’s approved.
Loan Uses
Most investors use hard money loans to purchase a commercial property, or they rehab one and then sell it for a profit. If they decide not to sell the property, they refinance it through a bank once they increase its value. Bridge loans are used when you’re waiting to sell one property and have another lined up before the first deal goes through. The bridge loan helps you buy the property you want while you wait for the first property’s sale to be complete.
Which Loan Is Best for You?
The loan that’s best for you will depend on the deal you want to make. If you’re trying to buy a commercial property that you believe you can sell for a profit within a year, then a commercial hard money loan might be your best option. This loan is ideal for those who can’t qualify for a traditional bank loan or who need money to make the deal happen right away.
You could be better off with a bridge loan if you have a property on the market that’s under contract or pending and you’ve found another property you want to buy. Instead of letting the deal slip through your fingers because of the slow bank loan approval process, you can get a bridge loan to cover you until the property sells.
Find Out More About Your Loan Options
Before you decide which loan to apply for, talk to the team at Titan Funding in Boca Raton. We can help guide you in your decision based on the project you have in mind. Our years of experience can provide you with the knowledge you need to make an informed choice. Contact us at 855-928-0737. We’re available from 9 a.m. to 6 p.m. EST Monday through Friday.