Bridge loan vs. hard-money loan: What's right for you?

When borrowing money to buy real estate, conventional mortgages and government-backed loans are the most common choice. Bridge loans, on the other hand, are designed to help homeowners buy a new home before they've sold their current home. Hard-money loans typically are used to buy investment properties.

Here’s a closer look at bridge and hard-money loans, and how they’re used to help you determine if either would be a good fit for your real estate purchase.

Rocket Mortgage^® currently offers bridge loans but not hard-money loans.

What’s a bridge loan?

A bridge loan is a short-term loan designed to bridge the gap between buying a new home and selling your current home. In many cases, the process isn’t as simple as selling your existing home and using that money to buy a new home. If your home sells quickly, you’d have to find temporary housing. If you buy your new home and your prior home doesn’t sell, you’ll be responsible for two mortgages.

A bridge loan provides money to cover the up-front costs of buying a new home while you sell your current home. Once that home sells, you can use the money to pay off your bridge loan.

A bridge loan is meant to be a source of temporary funding while you transition between homes. Here’s how a bridge loan is usually structured:

• You may need to get a bridge loan from your primary mortgage lender.
• Your current home used as collateral for the loan, so you’ll need to have some equity.
• Loan terms typically range from 6 – 12 months.
• You can close on a bridge loan more quickly than a mortgage.
• Interest rates usually are higher than rates for a primary mortgage.
• You’ll typically need a higher credit score than for a primary mortgage. Rocket Mortgage requires a minimum FICO Score of 740.
• You need to meet the maximum lender's debt-to-income ratio. Rocket Mortgage allows a maximum DTI ratio of 45%.
• Can come with interest-only or deferred payments to lower your monthly payment.
• You’ll be able to waive the home sale contingency when you buy your new home.

Who offers bridge loans?

Bridge loans are offered by many lenders, banks, and credit unions. However, not all banks and lenders offer this type of financing.

What’s a hard-money loan?

Hard-money loans are an alternative type of financing and are not considered traditional loans. Like a bridge loan, a hard-money loan is a short-term loan that is secured by property as collateral.

The term “hard money” refers to how you need to have a tangible asset to put against the financing. However, unlike other types of loans, hard-money loans are based on the value of the property instead of the borrower’s creditworthiness.

As a result, hard-money loans are easier to qualify for. Hard-money loans are a useful option for borrowers with low credit scores who can’t get approved for a traditional mortgage. However, lenders are taking on more risk, so they tend to charge higher interest rates for hard-money loans.

Here are some cases where a hard-money loan can make sense:

• You’re planning to flip a house and need fast money to buy an investment property.
• You own a business and want to acquire property but don’t qualify for traditional funding.
• Your credit score is low and you don’t qualify for a traditional mortgage.

People who take out a hard-money loan typically pay off the loan when they sell the investment property or when it’s generating enough money to do so.

Here is how a hard-money loan is typically structured:

• An investment property or commercial property is used as collateral.
• There aren’t strict credit requirements.
• Interest rates are higher than other loan types, typically ranging from 8% to 15%.
• Loan terms are shorter, ranging from six months to several years.
• You’ll typically need a down payment of 20% to 30%.
• You can close quickly since the approval is based on the property value.
• You may be able to make interest-only payments.
• There may be a prepayment penalty.

Who offers hard-money loans?

Hard-money loans are offered by private lenders, investors, and investment groups. Rocket Mortgage does not provide hard-money loans.

Bridge loans and hard-money loans: A comparison

Here’s a breakdown of some of the key differences between bridge loans and hard-money loans.

Best uses for bridge loans vs. hard-money loans

Let’s take a look that the most appropriate uses for bridge loans and hard-money loans.

Bridge loans

Bridge loans can be used by individual homeowners, investors, and businesses. Most commonly, this type of loan is used by people who are trying to sell their home and buy another one at the same time.

Here are some cases where a bridge loan make sense:

• You’re looking to buy a new home and plan to sell your existing home in the short term.
• You don’t know how long it will take to sell your home and you want to avoid being responsible for two mortgages.
• You want to avoid moving twice.
• You need to use your equity to make a down payment.
• It’s a seller’s market and you’re facing competition from other buyers.
• You want to strengthen your offer by waiving the home sale contingency.
• You want to flip a home and sell it in the near future.

New home down payment

A down payment is the percentage of the home you pay up front. As home prices have climbed, so has the minimum amount you need to come up with for a down payment. To get a conventional loan, you’ll need a down payment of at least 3%. That means if the home purchase price is $400,000, you’d need a down payment of at least $12,000.

If you’re paying a mortgage every month, it can take a while to save up that kind of money. A bridge loan can provide you with the money you need to make a down payment if you don’t have the cash on hand. Even if you do have some money saved, a bridge loan can help you make a larger down payment to reduce the monthly payments on your new mortgage.

New home closing costs

The other significant up-front expense of buying a new home is closing costs. These are all the fees the lender charges for your home purchase and new mortgage and range from 3% – 6% of the total loan amount. That means in addition to your down payment, you’d need an additional $12,000 to $24,000 to pay your closing costs. Even if you have enough money saved to make a down payment, you could use a bridge loan to cover your closing costs.

Hard-money loans

Hard-money loans are more commonly used by investors. Most commonly, people who take out hard-money loans plan on selling the asset that’s being used as collateral in the short term to pay off the loan.

Buying investment properties

A hard-money loan can be a practical financing option if you want to buy an investment property that you plan to flip. You’ll be able to access the cash you need to buy the property while knowing you can pay the loan off within a year of the home selling. Just be sure to consider the local market conditions and value of the property itself to gauge how easily you’ll be able to sell it.

Buying commercial properties

Business owners may find hard-money loans are a helpful way to buy an office space, warehouse, or other commercial property. This loan option can be especially useful if you’re a new entrepreneur with limited funding or credit history. It also can be a financing option if you’re looking to use collateral that isn’t typically accepted by traditional lenders, like a food truck.

The bottom line: How to choose between a bridge loan and a hard-money loan

Bridge loans and hard-money loans are both examples of short-term financing that use property as collateral. Bridge loans are more commonly used by homeowners who want to buy a new home and need cash to cover the up-front costs. Hard-money loans are more geared toward investors buying a commercial property or a residential property they wish to flip. Be sure to fully understand the terms, pros, and cons of either loan option to know if it’s the right fit for you.

Rocket Mortgage bridge loans are available for up to 6 months and $500,000. If you think this might be the loan option for you, apply for a bridge loan today.

¹ The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.