How Do Hard Money and Bridge Loans Work for Someone with Bad Credit?

David Cohn
Jun 7, 2023
Hard Money Loans

Are you ready to buy a commercial property but need the money quickly? Getting approved for a loan from traditional lenders—especially one backed by the Small Business Administration—can take weeks or even months, causing you to miss out on opportunities.

And if you need better credit and financing for an investment property, the usual financing sources like banks and mortgage companies may turn you down. In addition, many do not offer loan programs for those with lower credit scores than their threshold.

Fortunately, private money lenders offer hard money and bridge loans that can provide the funds you need and even help improve your credit score in the long run. With these types of loans, you can make a cash offer without dealing with the lengthy process associated with traditional financing.

What are hard money and bridge loans for commercial real estate?

Both hard money and bridge loans are short-term loans designed to provide funds for purchasing real estate or essential equipment. The loan term is typically a year to 36 months. These loans are secured by real estate, which can either be the property you want to purchase or an existing property you already own. In both cases, a down payment of 20% to 30% is required, either as a down payment on the new property or built up as equity in the current property.

The amount you can get from these loans is always less than the property's value. This allows the lender to sell the property for a profit if you default on the loan. Bridge loans and hard money loans are often structured as interest-only loans. This means that you pay only the interest on the loan during the term, and the principal balance is due as a lump sum at maturity.

Although real estate investors use both loan types for similar purposes, there are significant differences in risk management strategies between a bridge lender and a hard money lender. Let's delve into the topic further to understand better the similarities and differences between a bridge loan and a hard money loan.

What are bridge loans for CRE?

A bridge loan is a type of temporary financing collateralized by assets, and it's designed to provide short-term funding to "bridge the gap" between the present and a future date. This type of loan benefits real estate investors who want to take advantage of an attractive investment opportunity due to having their funds tied up in other investments.

For example, let's assume that you're selling a rental property and plan to utilize the proceeds to buy another investment property that happens to be time-sensitive. If the sale of your current property is delayed and you need more cash to finalize your new purchase, you might lose the opportunity.

Rather than forfeiting the investment opportunity, a bridge loan can finance the acquisition as quickly as if you were paying cash. In this way, bridge loans can offer investors greater flexibility and enable them to make quick sales or purchases when liquidity is unexpectedly tight.

A bridge loan can also offer you the funds you need to proceed with a transaction rapidly. At the same time, you wait for long-term financing to become available, which can typically take several months or longer, depending on the approval requirements.

Bridge loans are designed to be flexible and can be tailored to fit your specific investment requirements. They are commonly used for purchasing or refinancing investment properties, including residential, commercial, and vacant land. They can also be used to bridge a gap in liquidity while waiting for long-term financing or the payout from a sale of an asset or other investment.

As with most asset-based lenders, the collateral value is the primary focus for bridge lenders when making lending decisions. This means that proof of income, such as tax returns or pay stubs, may not be required for approval.

However, some bridge lenders may consider the sponsor's financial strength, background, creditworthiness, and real estate experience in their risk assessment, which can result in a higher loan-to-value or a lower interest rate.

Moreover, lenders specializing in bridge financing typically offer more outstanding loan sums and have expertise in funding high-end investment properties, including pre-construction condominiums and waterfront parcels intended for development.

As a result, bridge loans can be a viable option for multi-million-dollar investments. Bridge loans may only be suitable for some real estate investment strategies. Most bridge lenders favor completed projects, so obtaining a bridge loan to purchase a fixer-upper that requires significant renovations could be challenging. You may be required to borrow a smaller amount since the lender will lend based on the current property value instead of the after-repair value.

Nevertheless, a bridge loan can be used to purchase or refinance land. This is a viable option for custom home builders and spec home developers who want to buy land or tap into the equity of their existing land to begin the construction process. At the same time, they wait to be approved for a construction loan.

What are hard money loans for CRE?

Hard money lenders typically concentrate on the value of the asset rather than the borrower's financial strength or creditworthiness, allowing them to fund deals quickly with minimal documentation. As a result, borrowers with poor credit or unverifiable income may find hard money loans a viable option.

Suppose you own an investment property that needs significant renovations before leasing. In that case, you can use the property as collateral to secure a hard money loan and use the proceeds to complete the repairs.Hard money loans have several benefits and advantages. First, they require minimal documentation, making them an attractive option for individuals with poor credit.

Moreover, hard money loans have a rapid approval process since they are primarily based on the value of the collateral, which means that investors who need funding quickly can benefit from these loans.

Another advantage is that some hard money loans provide 100% financing through cross-collateralization, making them a suitable option for investors who wish to leverage the equity in their portfolio to acquire additional properties. The simple approval process makes it easier for new investors to enter the fix-and-flip market.All this said hard money loans come with a few disadvantages.

Since these loans do not consider the borrower's creditworthiness or financial strength, they typically carry higher fees and interest rates than traditional or alternative forms of financing to account for unknown risks.

Moreover, some hard money loans may have prepayment penalties if the borrower decides to pay off the loan early. These penalties could be in the form of a percentage of the loan balance or a lump sum. Therefore, if early repayment is something you are considering, it’s essential to ask the lender in advance about any associated fees.

Do I qualify for CRE hard money or bridge loans?

Hard money and bridge loans are much easier to qualify for than conventional mortgages and government-backed loans like SBA 504s because they are based on the collateral value of the property—not the borrower's creditworthiness.

Hard money and bridge lenders do not require a minimum credit score from borrowers, but they may still request your credit score. Instead of focusing on your creditworthiness, these lenders concentrate on the asset's LTV ratio. There is no need to worry about bankruptcies, foreclosures, or collections because these loans do not involve underwriting.

Financial checks for hard money and bridge loans are less thorough and take less time than conventional loans. In addition, these lenders are not subject to the same regulations as traditional banks, so they can approve financing much more quickly. While a standard bank loan might take 90 days to process, the proceeds from a hard money loan can be obtained in a matter of days—sometimes less than a week.

Are there any downsides to a hard money or bridge loan?

Hard money and bridge loans are more expensive than government-backed loans such as SBA-backed commercial real estate loans. In addition, getting approved for a hard money bridge loan requires a significant amount of capital.

If you have at least 20% to 30% equity in your existing property, you can use it as collateral to purchase a new property. The alternative is to make a down payment of 25% to 30% on the new property. This makes hard money and bridge loans less useful for investors who still need substantial capital in their business.

Another disadvantage is the short repayment period of these loans, usually around one year. So unless you plan to sell the property within a year, you may need to look for financing with a lower interest rate and more flexible terms immediately after closing.

Capital Investors Direct provides a range of financing options to commercial real estate investors and entrepreneurs. Our speedy approval process lets you immediately seize profitable real estate opportunities. Get in touch with our team to explore your options. Let’s work together to find the right solution for your CRE financing needs.