Bridge Loan Terms, LTV Ratios and Common Misconceptions

What Is a Bridge Loan?

A real estate bridge loan is a short-term loan that allows a property owner to borrow against the equity in their existing property to purchase a new property, then pay off the loan once the previous property sells. For the full explanation, see what a bridge loan is and how it works.

Bridge Loan Misconceptions

Some borrowers mistakenly refer to any short-term or temporary loan as a bridge loan. While the term “bridge loan” is commonly used to describe any type of temporary financing, this does not accurately represent the true definition of a bridge loan.

How Does a Bridge Loan Work? A Bridge Loan Example

A family with strong equity in their current home can use a bridge loan to buy their next home before selling, then pay off the bridge loan once the previous home sells, avoiding the cost and hassle of moving twice. See a full bridge loan example that walks through the numbers step by step.

Who Offers Bridge Loans? Where to get a Bridge Loan

Many bridge loan lenders are private hard money lenders. Some credit unions and banks may offer bridge loans, but many do not as they prefer to fund long-term loans. Hard money lenders are short-term lenders and happy to provide funding for bridge loans.

Hard money bridge loan lenders have higher interest rates than conventional lenders. Although the rates are higher, hard money lenders are able to provide a much faster and easier approval and funding process. For an owner-occupied property, expect the approval and fund for a hard money bridge loan to take 2-3 weeks while a bank bridge loan may take 30-45+ days. If the real estate being used as collateral is an investment property, the hard money bridge loan can be approved and funded within 5 days if needed.

Ability to Repay Exemption for Owner Occupied Bridge Loans

A bridge loan with a term of 12 months or less is exempt from the Ability to Repay Rule. In the case of a bridge loan, the existing property that will be sold as soon as the new property is acquired serves as repayment for the loan. Income documentation from the borrower is not scrutinized as closely as it would be for a long-term owner-occupied loan.

Any other owner-occupied loan requires a borrower to meet the Ability to Repay requirement by proving their income with 3^rd party documentation such as tax returns, W2s or paystubs.

Not needing to provide proof of income verification is especially beneficial for various individuals such as:

• seniors or retirees with limited income
• self-employed individuals
• those without significant income in the past few years

Flexibility of Bridge Loans

Bridge loans can be used in a variety of ways in order to help accomplish the current financing goals of the borrower. As previously stated, the bridge loan can be secured against the existing real estate owned by the borrower. A bridge loan is also able to be used in reverse order by having the bridge loan secured against the new real estate which is being purchased. If needed, a bridge loan may be secured by both the existing and new property.

Bridge Loan LTV Ratios

Bridge loan lenders typically can provide a loan to value of up to 70-75% of the current value of the property. If the property currently has an existing mortgage the bridge loan lender will want to refinance this balance and provide a new 1^st loan.

Typical Bridge Loan Terms

Most residential bridge loans in California are written for terms of 11 to 12 months. Owner occupied bridge loans stay at 12 months or less to qualify for the Ability to Repay exemption, while investment property bridge loans may run 1 to 3 years when the borrower needs more time. Interest is typically paid monthly, interest only, with the principal repaid in full when the existing property sells or the loan is refinanced. There is generally no prepayment penalty on North Coast Financial bridge loans, so paying the loan off early reduces the total interest cost.

Bridge Loan Rates and Fees

Bridge loan rates from hard money lenders are commonly in the range of 8-11% plus 1.5-3 points, and vary by lender, location, property and loan to value. See our full breakdown of current bridge loan rates and fees.

How to Qualify for a Bridge Loan

Qualifying for a bridge loan from a hard money lender is based primarily on equity, not income or credit. See the full bridge loan requirements for details.

For more information on bridge loans visit our Bridge Loans page or contact North Coast Financial now.