A common type of hard money mortgage loan is the bridge or gap loan. As the names imply, it is used to connect transactions (bridge) or fill a void (gap) between transactions. The following are examples of the use of these loans.
• Your home is in foreclosure. You can sell it and come out with some money, but you need time to do this. You already have a buyer and have opened escrow. You get a temporary loan to reinstate your mortgage until your sale is finalized.
• You want to buy property, but have to act immediately. You can either sell other property or arrange financing to cover the purchase, but you do not have time for either. You get a hard money loan until you can either sell or arrange suitable financing.
• You have a small business. You have an opportunity to buy inventory at a once-in-a-lifetime price. You know that you can make a large profit, but you need cash to take advantage of the deal. You get a hard money loan until you can sell off enough of the product to pay it off.
All of these loans involve the borrower mortgaging property, usually his or her home, for a short period of time. Most of these loans are for one year or less. They depend on equity for security, and the borrower’s credit or income-to-debt ratios are of secondary importance. The loans fund quickly, some as fast as one week.
The up-front cost of these loans is usually one or two points, plus miscellaneous fees. The higher cost comes when the loan is repaid. This can be as high as 10% of the balance.