This article explores the fundamental differences between traditional and private bridge loans, focusing on their purpose, eligibility criteria, and specific terms.
The Differences Between Traditional and Private Bridge Loans
Here’s a breakdown of the key differences between traditional and private bridge loans.
Purpose
Traditional bridge loans are bank issued, and tailored to meet the needs of property owners seeking a short-term financing solution for a residential property (-ies). The primary purpose of traditional bridge loans is to facilitate a smooth transition between the purchase of a new property and the sale of an existing one. This means that borrowers can secure funds for purchasing a new property without waiting for their current property to sell. Borrowers can also use traditional bridge loans to finance renovations or repairs on a newly purchased property before transitioning to a long-term mortgage.
Traditional bridge loans may take longer to be approved because these lenders conduct a thorough assessment of the borrower’s financial history, creditworthiness, and collateral before approving the loan. As a result, borrowers may acquire a bridge loan from a private hard money lender who may have less stringent requirements and a faster approval process.
Private bridge loans are issued by hard money lenders and cater to the needs of real estate investors looking to swiftly acquire an investment property in a competitive market or capitalize on distressed property opportunities without being impeded by traditional financing hurdles. Real estate investors often use private bridge loans to finance the purchase and renovation of investment properties, and then flip them or resell them for a profit.
Eligibility Criteria
When applying for a bridge loan, whether traditional or private, borrowers must meet specific eligibility criteria tailored to each type of loan.
For private bridge loans, at HCS Equity, we typically focus on the equity in the property being sold or already owned to determine the borrower’s ability to secure the loan and mitigate risk. The equity in the property serves as collateral for our bridge loan, The maximum threshold to qualify is 65% of the current property’s equity, but we’re also willing to cross-collateralize multiple properties if needed.
The property’s value serves as a crucial factor in determining the loan amount and terms. If the property has a higher value, we can provide a larger loan amount and more favorable terms.
Traditional lenders, such as banks and credit unions, often have strict underwriting criteria. They require extensive documentation and thorough financial assessments to evaluate the borrower’s creditworthiness, income stability, and collateral.
Similarly to private lenders, traditional lenders typically require a minimum level of equity in the borrower’s existing property. However, borrowers are required to have a good credit score to qualify for a traditional bridge loan. While specific credit score requirements may vary by lender, a higher credit score generally improves the chances of loan approval and may also affect the interest rate offered.
Traditional lenders will want to see a solid exit strategy plan for how the borrower intends to repay the bridge loan, e.g., by selling the existing property or securing long-term financing through a traditional mortgage. Additionally, they may evaluate the borrower’s income, employment status, and other financial obligations.
Specific Terms
The terms of private bridge loans are typically structured around the value of the borrower’s existing property and the anticipated sale of the property. We may be less concerned about the borrower’s credit and income history and more interested in the value of the property. The loan amount is determined based on a percentage of the borrower’s existing property’s value, known as the loan-to-value (LTV) ratio. In our case, we typically offer bridge loans with an LTV ratio of up to 65% of the property’s appraised value.
The principal balance of the private bridge loan is typically repaid in full when the borrower’s existing property is sold. The proceeds from the sale are then used to settle the outstanding loan balance, along with any accrued interest and fees. Private bridge loans typically have shorter terms, often ranging from 6 months to 1 year, depending on the specific scenario.
Similar to private bridge loans, the loan amount for traditional bridge loans is based on a percentage of the property’s current value. In addition, traditional bank lenders may also consider the potential income generated by the investment property, the property’s condition, and the investor’s overall financial strength (e.g., credit history, liquidity) to determine if they will be able to repay the bridge loan. Particularly due to the strict underwriting criteria, bridge loans from traditional lenders may take longer to be approved.
Additionally, interest rates for traditional and private bridge loans are influenced by several factors, including the LTV ratio, prevailing market conditions, and the lender’s interest rate range. However, private bridge loans may carry higher interest rates compared to traditional bridge loans due to the perceived higher risk, short-term nature of the loan, expedited processing, and flexible underwriting criteria.
The Bottom Line: The Role of Hard Money Lenders in Providing Bridge Loans
While both traditional bridge loans and private bridge loans serve as valuable financing options for real estate transactions, understanding their key differences can help borrowers choose the right type of bridge loan that aligns with their specific needs and goals.
At HCS Equity, we’re proud to offer private bridge loans for both residential and investment properties, designed to meet the diverse needs of our clients. We’ve streamlined our loan approval and funding process, enabling borrowers to receive the necessary funds within 7 business days of application submission.
Obtain a private bridge loan from HCS Equity, at competitive rates with no prepayment penalty or minimum months of interest due.
