What is a Bridge Loan?
A bridge loan in its simplest form is a sum of money lent by a private lending company to cover an interval between two transactions. Used in both residential and commercial real estate ventures, bridge loans serve as a way for the borrower to procure the financing they need during the span of time between the sale of a property and the purchase of another.
By providing quick cash flow, bridge loans enable a user to meet current financial obligations, allowing them to take advantage of an immediate property investment opportunity. Bridge loans are known by several names: interim financing, bridge financing, gap financing, and swing loans are just a few of the terms you might hear in reference to this type of hard money loan.
Residential Bridge Loans
In the real estate market, a bridge loan is a way of “bridging the gap” of time between selling one’s current home and purchasing a new property, and serves as an ideal temporary solution. These short-term loans are taken out by a borrower against their current property, and are very popular in the real estate market. Residential bridge loans are most often used to fund a down payment on a new home while still retaining ownership on an old one. This gives the borrower time to secure more permanent, long-term financing, which they can then use to pay off the bridge loan.
Commercial Bridge Loans
Real estate bridge loans are used for more than residential purchases. Commercial lending allows a company the funds needed to complete the sale of a property by using commercial inventory and property as the required collateral. Businesses often use bridge loans when they are waiting for long-term financing, but need capital to cover business expenses in the meantime.
Where to Find Bridge Loans
Not all banks and finance companies offer bridge loans. Borrowers must use hard money lenders in San Diego like SD Equity Partners to find the hard money loans necessary to purchase their desired property. A mortgage bridge loan typically requires borrowers to have good credit and a low debt-to-income ratio, and serves to combine the mortgages of two homes together, giving the borrower a measure of flexibility during the waiting period.
In general, bridge loan lenders will provide bridge financing worth up to 80 percent of the combined value of the collateral in the case of real estate. In terms of commercial properties, bridge loans generally do not exceed 65 percent. The actual amount in each case depends on appraised value of the property in question.
Bridge Loans versus Traditional Loans
There are a few differences between traditional loans from banks and bridge loans. For borrowers that need quick financing, a real estate bridge loan can be much easier to procure. Traditional loans tend to have longer application periods and approval can take months. Bridge loans are accessed easily, with an expedited process. Once approved, a traditional loan may take months to pay out, whereas bridge loans tend to be available immediately.
A bridge loan lender can often provide the short-term financing a user needs during times when money is needed but not readily available. Due to the convenience of mortgage bridge loans, hard money lenders generally provide these loans with short terms and high interest rates.
Paying Off a Bridge Loan
Generally, borrowers pay off a mortgage bridge loan or commercial hard money loans with other low-interest, long-term financing. They may also pay the loan back when the property is sold, their creditworthiness improves, a property project is completed (like flipping a house), or there’s an improvement or alteration in a property that allows for permanent mortgage financing.