A Bridge Loan: What’s It For And How Does It Work
Money must work. That’s one of the basic rules of financial literacy. Every day, the untouched cash in a piggy bank or a bank account loses its purchasing power. A smart investment like real estate investing will help protect them from inflation and generate additional income. However, such a venture requires significant sources of financing. A hard money loan, offered by hard money lenders, not banks, is one of the ways out of the situation. But sometimes, you lack a short yet powerful financial impulse to achieve the goal. The bridge loan is a tradeoff for you, providing immediate access to funds. Let’s define this term to make your home purchasing adventure easier.
Bridge Loan as a Short-Term Form of Financing
So, what is a bridge loan? Creative bankers did not accidentally come up with the name for this type of safe lending. A bridge loan, also called ‘bridge financing,’ ‘swing loans,’ ‘interim financing,’ or ‘gap financing,’ is essentially a kind of bridge that gives a businessman or individual a chance to overcome the barrier of lack of funds and opens up access to cash flow as fast as possible. Secured by collateral, such as the borrower’s property or other assets, bridge financing refers to a short-term loan with the ability to borrow money for up to a year. Unlike standard long-term financing options, a bridge loan is expensive for the client yet faster in terms of application and underwriting. This type of loan is popular enough among homeowners with the required property equity who seek quick funds to purchase a new home.
Who Can Use It And When?
Bridge loans have a sufficiently broad pool of potential clients — individuals and legal entities involved in real estate investments. Commercial companies use it for immediate real estate opportunities or to finance short-term expenses against tangible assets or funds. As for individuals, they customarily use it to span the gap between buying a new home and selling an old one. For instance, you have picked out new real estate property, but do not have enough cash to apply to the down payment on your new residence. The old house is still on sale, so you have no profit from selling it. What is the way out? You can apply for a bridge loan, the best option for financing your future project.
Conditionality of Lending
A borrower can take out a bridge loan while he waits for his current home to sell by meeting several requirements. He is obligated to:
– Pledge his current home or have other asset collateral (equity, debentures, etc.) to secure the debt.
– Have at least 20% equity in that home, financing up to 80% of the combined value of both homes.
– Make a down payment on their new home.
– Fully repay the debt at the end of the term.
Terms & Costs
Bridge financing is usually offered for 6–12 months at an excessive rate. As a rule, interest rates on bridge loans directly depend on the client’s creditworthiness and the loan amount. Above paying interest on the bridge loan, borrowers must cover other costs and fees, including administrative, appraisal, loan origination fees, title policy costs, etc.
It is not surprising that interest rates and fees are higher than usual as the lender exposes itself to increased risks by entering into such a deal. At that stage, the borrower’s position is very precarious, and the likelihood of bankruptcy is higher than the average bank client. Thus, gap financing is mostly in demand by borrowers who are creditworthy and confident that their current home will sell quickly. If the chances of selling an old house are high, borrowers can obtain fast approval for a short-term loan for a new residence from lenders.
Pros and Cons of Bridge Loans
A bridge loan is very lucrative for both the borrower and the lender. The main advantage of such a loan is that it provides an effective way out of a dead-end situation where you want to purchase a property, but do not have enough money to implement your idea, especially when funding the purchase of a primary home. Another reason to take out a bridge loan is minimum paperwork for the application, and fast underwriting and funding processes, unlike standard home loans. However, for all their benefits, interim financing has disadvantages, due to which clients often refuse such loans. That goes for high-interest rates and enormous monthly payments, including a mortgage you’ll have to pay. Remember that the bridge loan is meant only to ‘bridge’ the gap until you can afford longer-term finance.
Lending Bee, Inc. provides a bridge loan program in its portfolio as a direct lender. It may be beneficial if you urgently need additional financial resources to improve your flow and meet short-term liquidity requirements. Get bridge loan advice, make an appointment and apply for bridge funding by contacting our managers. We evaluate each application individually, offering the best financing terms, taking into account the peculiarities, needs & possibilities of your situation, and are ready to provide you with a bridge loan.