What is a Bridge Loan?
In its most basic form, a real estate bridge loan is short-term financing provided to a borrower until they can secure permanent financing. Bridge loans are funded quickly and secured by real estate.
More specifically, a property owner uses a bridge loan to borrow against the equity in their existing property to finance the purchase of a new property. As soon as the new property is acquired, the previous property is sold in order to pay off the bridge loan.
Bridge loans can also be utilized in reverse order by obtaining the loan against the new property being purchased and then paying off this loan when the previous property is sold.
Bridge loan financing typically has a term from one month to 11 months. North Coast Financial is able to provide funding for hard money bridge loans on investment property within a matter of days. Owner occupied residential bridge loans take longer to fund (generally 2-3 weeks) due to current federal regulations that must be followed.
Real estate bridge loans are known by many other names including bridging loan, bridge financing, bridge loan mortgage, gap financing, caveat loan, interim financing or a swing loan.
Residential Bridge Loans – Residential Bridge Loan Lenders
A residential bridge loan is a popular way for real estate investors and property owners (homeowners) to borrow against their existing residential property in order to purchase a new property.
In many cases a property owner wishes to purchase a new owner occupied primary residence but doesn’t have the necessary liquid funds for a down payment. The property owner could sell their current residence and use the proceeds from the sale for the down payment, but they would then have to find temporary housing until the purchase of their new primary residence is complete. This logistical hassle of moving twice can be avoided with bridge loan financing from a residential bridge loan lender.
With a residential bridge loan, the property owner is able to pull equity from their existing property to raise a down payment for the purchase of a new property. Once the new property is acquired, the original property is sold in order to pay off the residential bridge loan.
Residential bridge loan lenders are less concerned with the credit worthiness of the borrower since the bridge loan is secured by the equity in the borrower’s property. This is beneficial for borrowers who may currently have less than ideal credit or issues on their record but have sufficient equity in their property.
Residential bridge loan lenders are able to provide funding very quickly as the source of the funds is private money as opposed to an institutional lender.
Commercial Bridge Loans – Commercial Mortgage Bridge Loans
Commercial bridge loans are available for commercial property owners who wish to borrow against their existing real estate to fund a down payment for the purchase of new commercial property. This is often done when a real estate owner is currently lacking sufficient liquidity but has plenty of equity to borrow against. Once the new commercial property is purchased, the borrower can then sell their original property in order to pay off the short term commercial bridge loan.
Commercial mortgage bridge loans are for short term use and usually written for no longer than 11 months. Commercial bridge loans generally have a lower loan to value ratio (LTV) than residential bridge loans and the commercial bridge loan lenders may require additional information and documentation as commercial loans are typically more complex than residential.
Pros & Cons of Bridge Loans
Bridge loan mortgages can save time and money for real estate investors and homeowners in specific situations but they are not necessary for most borrowers. Ensure that the pros outweigh the cons prior to pursuing bridge loan financing.
Pros of a Bridge Loan
PRO – Quickly utilize equity within a property without selling
This primary benefit of a bridge loan is borrowing against the equity in an existing property to purchase a new property. Bridge loans for investment property can be funded within a few days if needed. Owner occupied residential bridge loan mortgages generally take 2-3 weeks due to current federal regulations.
PRO – Avoiding the inconvenience and cost of moving twice to purchase a new home
When a homeowner has sufficient equity in their primary residence but doesn’t have enough cash available for a down payment for the purchase of a new home, they may be forced to do the following:
- Sell their current home
- Move into temporary housing
- Purchase the new home
- Move into the new home
If the homeowner instead took out a bridge loan mortgage, this would allow them to only move a single time. Once they had purchased their new home they could simply sell their existing residence to pay off the bridge loan.
PRO – Have an offer accepted without a contingency to sell existing home
Many homebuyers to submit offers with a contingency that the homebuyer’s current residence must first be sold. Homebuyers have this contingency when they need the net proceeds from the sale of their current home in order to purchase the new residence.
Sellers view an offer with this type of contingency as weak and are much less likely to accept it, especially in a hot real estate market.
A buyer who first obtained a bridge loan mortgage against their current residence would have the necessary funds for a down payment (or possibly full amount of the purchase price in cash) and could present an offer without the contingency of first selling their existing property.
PRO – Bridge lenders provide loans to borrowers denied by banks and credit unions
Bridge lenders are primarily focused on the value of the borrower’s property and the existing equity as opposed to the borrower’s income and creditworthiness.
Banks generally deny a loan request due to poor credit or other problems on record such recent bankruptcies, short sales, loan modifications, foreclosures, mortgage lates, insufficient employment history or being self-employed.
Private money bridge loan lenders can still consider providing bridge loans to borrowers with the previously mentioned issues if the borrower has adequate equity in the property.
PRO – Bridge loans are available against property currently listed on the market
Traditional lenders will not provide a loan against a property that is currently listed for sale. These lenders do not want to go through the approval and underwriting process only to have the loan pay off within a few months. Short-term lending is not their thing.
Bridge loan lenders understand the importance of providing short-term financing and have no problem with funding a bridge loan mortgage against property that is currently on the market.
PRO – Bridge loans do not require “ability to repay” for qualification
For owner occupied loans, current federal regulations for qualifying are strict. Borrowers must prove they have sufficient income and provide financial information to the lender to ensure the borrower’s debt to income ratio (DTI) will stay be below a certain limit.
Borrowers for owner occupied property who cannot currently prove they have adequate income to qualify for the needed loan amount will not be able to receive financing from either a conventional or hard money lender.
A bridge loan is an exception to these government regulations. The sale of the existing property serves as the repayment for the borrowed loan amount as opposed to income.
The bridge lender will still want to understand the borrower’s income and expenses to ensure the borrower is able to make the necessary payments on the loan.
Cons of a Bridge Loan
CON – Higher interest rates compared to conventional loans
Interest rates for bridge loans from hard money lenders will be higher compared to conventional bank loans. The higher interest rates are generally offset by the ease of obtaining the loan and the speed of funding.
CON – Higher transaction costs
The origination fees for bridge loans are often around 2 points. The borrower will also need to pay all of the standard real estate transaction fees such as escrow, title, recording and notary fees.
Bridge Loan Rates – Bridge Loan Terms
Bridge Loan Rates
Bridge loan rates from hard money lenders are higher than traditional institution loans due to the increased risk. Bridge loan rates will vary from lender to lender, but will generally be in the range of 8-10% interest for hard money bridge loans depending on various factors of the specific bridge loan scenario.
While the bridge loan rates from a hard money lender will be higher, the borrower will be able to receive funding within a week or two (compared to over a month from a traditional lender). The likelihood of the bridge loan being approved by a hard money lender is much higher as they do not have the same stringent lending requirements as banks.
Loan to Value Ratios (LTV) and Loan Amounts for Bridge Loans
Bridge loans from hard money lenders have lower loan to value ratios (LTV) than traditional mortgages obtained from banks. The bridge loan lender will generally allow for a loan to value ratio up to 70-75% for residential property. This is to ensure the borrower has enough equity in the property to protect the lender from a default.
Loan amounts available for a residential bridge loan can range from a relatively small amount of $20,000 to a jumbo bridge loan in the millions of dollars. The borrower may sell the property or arrange other long-term financing in order to pay off the bridge loan.
Read More: What is a bridge loan?
Bridge Loan Example
An example of a traditional bridge loan would be when an investor owns a property and wishes to purchase a new property. The investor doesn’t have sufficient funds to purchase the new property but needs to secure the new property before selling the existing property. The investor is able to use bridge loan financing to borrower against the property they already own to raise funds for the purchase of the new property.
Once the new property is purchased, the investor can sell their original property and pay off the bridge loan. The bridge loan “bridges the gap” between the purchase of the new property and the sale of the existing property.
Property Types for Bridge Loans
Bridge loans are available for various types of property such as:
- Owner occupied or investment
- Single-family, multi-family, apartment building
North Coast Financial is an experienced hard money bridge loan lender. Contact us now to see how we can help you with your real estate financing needs.