The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.

Many hard money mortgages are made by private investors, generally in their local areas. In the past documenting credit history and income were not as important, as the loan is secured by the quick sale value of the collateral property. Today most hard money lenders require a traditional credit review.

Quick sale value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress and assumes amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe.

1) Common reasons for seeking a hard/private money loan:
a. Homeowner or subject property does not qualify for traditional agency type loan (FHA, VA, Fannie, Freddie)
b. Investor purchasing a home in need of a temporary bridge loan
c. Homeowner wants to stop foreclosure
d. Pull equity out
e. Unusual type of property
f. Borrower needs to establish creditworthiness

2) Typical terms: 
a. 50% to 70% max loan to value
b. Higher interest rates: 12 to 18%
c. Balloon payments
d. First mortgage lien position
e. Higher fees: 4to 8 points
f. Full documentation
g. Detailed appraisal

3) Differences between hard money and private money
a. Hard money lenders are licensed and organized to lend money and private money lenders could be a friend, a family, a business associate.
b. Hard money lenders have set lending criteria with defined loan terms, rates and points all of which are known up front.  Private money is more flexible on all the typical criteria and open to negotiation.
c. Private money lending is often less expensive than hard money loans.   Hard money lenders get their money from private sources so they mark up the rate and fees to make a profit.  When an LO works directly with private sources of capital, you can often negotiate better terms.

4) Hard or Private money borrowers need to plan an exit strategy prior to obtaining the loan. 

Traditional lenders and investors may require a minimum of 6 to 12 months seasoning on title to refinance to the new appraised value. When your clients are using hard money to acquire investment properties you will need prepare them to be in that hard or private money for 12 months.

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Due to each state’s different usury laws, many hard/private money lenders are refusing to loan on residential, owner occupied homes and instead prefer to only make business-related loans or investor loans. Fees on hard/private money loans can be quite lucrative at 5 to 8 points. 

Q: In the mid-1980s when many loan officers worked at a bank and the mortgage broker community was quite small, mortgage brokers were THE source for hard and private mortgage money.  When a person could not get a loan at a bank, consumer finance company, or credit union, they found a broker and the broker was the person who knew where to find mortgage money for that particular person whose situation fell outside of traditional guidelines. Do you believe mortgage brokers will once again become this source or is it still fairly easy to compete against bank loan officers for traditional vanilla mortgage products?