Hard Money Bridge Loan: What it is & How it Works

  • February 4, 2022

So, you’re ready to purchase a property, but you need the money immediately. A bank could take weeks or months to approve you for a loan, especially if the loan is backed by the government through the Small Business Administration. That delay could lead to a lost opportunity.

Alternatively, a hard money bridge loan from AVANA Capital will allow you to make a cash offer without jumping through any of the hoops associated with traditional financing. 

What is a Hard Money Bridge Loan?

Commercial bridge loans are a form of short-term lending, designed to get you the money necessary for purchasing real estate or vital equipment, with a term length that’s typically a year or less. Hard money bridge loans use real estate as collateral, which can either be the property you’re purchasing or one that you already own. In either case, you’ll need to put 20-30% down, in the form of a down payment on the new property or built up as equity in your current property. 

The value of a hard money bridge loan will always be significantly less than the value of the property, allowing the lender to sell the property for a profit in the event of a default.

Can I Qualify for a Hard Money Bridge Loan?

Compared to conventional mortgages and government-backed loans like SBA 504s, hard money bridge loans are exceptionally easy to qualify for. That’s because these loans are based on the value of the property, rather than the creditworthiness of the borrower. 

Lenders are only interested in two things when making a hard money bridge loan: the size of the buyer’s down payment or equity value and the conditions of the real estate market should the buyer default and the property need to be sold. In most cases, the buyer can be approved for the loan in just a few days. Compare that to the month or more it takes to get a traditional loan from a bank.

What Are the Advantages of a Hard Money Bridge Loan?

One of the biggest snags with commercial real estate investment is the time it takes to get a traditional loan. Before approving you for a traditional real estate loan, banks and government agencies will research your creditworthiness, your business’s finances, and the sustainability of your business plan. That research can drag on for weeks or even months. Approval for a hard money bridge loan is solely based on your current equity or down payment. Commercial real estate loans from AVANA Capital take just a few days. 

There are also some real estate purchases that are unlikely to ever be financed by traditional banks. One example of this would be flipping a home; the buyer might only need a few months to make the necessary renovations before it goes back on the market at a much higher price. Those few months of interest payments simply aren’t worth it for most banks, but that kind of timetable is ideal for hard money bridge loans.

Hard money bridge loan lenders will also ignore past issues that would be deal-breakers for traditional banks. Most banks will not approve loans for business owners that have foreclosures or bankruptcies on their record. However, hard money bridge loans are backed by property equity or a significant down payment rather than one’s creditworthiness, making those past issues irrelevant.

What Are the Downsides of a Hard Money Bridge Loan?

While they might appear to be a cure-all for every problem a real estate investor might encounter, hard money bridge loans have some disadvantages. The most obvious drawback is their cost. An SBA-backed commercial real estate loan might have an interest rate between 3% and 5%. Hard money bridge loans are significantly more expensive, with interest rates between 10% and 20%, in addition to any other fees charged by the lender. 

You’ll also need a significant amount of capital to be approved for a hard money bridge loan. If you already own property with at least 20% to 30% of the value of the loan in equity, you could use that property as collateral to purchase a new property. This carries some risk, but the alternative involves making a down payment on the new property of 25% to 30%. Hard money bridge loans are much less useful when you don’t already have a lot of capital already invested in your business.

These loans also need to be paid back in a relatively short period of time, usually somewhere around the one-year mark. Unless you’re purchasing the property with the intent to sell it within a year, you may want to start looking for financing with a lower interest rate and more relaxed terms immediately after closing.

Get a Hard Money Bridge Loan from AVANA Capital

AVANA Capital offers short-term financing solutions to commercial real estate investors and entrepreneurs with a fast closing process and low interest-only payments for 12 to 36 months. You can be approved in as little as three days and close just a few weeks later, allowing you to take advantage of profitable real estate opportunities. Apply today or contact us to learn more about your real estate financing options.