Bridge loans are short term loans that are taken out for a duration of 2 weeks to 3 years awaiting the arrangement of bigger and more permanent financing. This interim financing is meant to help an individual or company until they obtain another form of financing. Money gotten from the new funding is used to pay back the bridge loan. Bridge loans are more expensive than other forms of financing in an attempt to compensate for their risk. Therefore, they have a higher rate of interest. Bridge loan lenders might also need cross-collateralization.
A bridge loan is used for the purchase of commercial real estate to close on property as quickly as possible and to retrieve houses from foreclosure, etc. Bridge loans are paid back when the purchased properties are sold, refinanced by traditional lenders or when a property is completed. The biggest advantage of these loans is the speed and the fact that they can be obtained with ease. Bridge loans can be gotten with minimal paperwork and lenient guidelines. The interest rates of a bridge loan range from 12 to 15 percent for a one year term. The loan can either be closed or open.
An open bridge loan does not have a fixed date of when you are expected to pay back. This poses a greater risk to the lenders. As a result, this loan tends to attract a higher rate of interest than its counterpart. However, a certain date is set for when the regular payments must start. A closed loan on the other hand has a fixed date by which the loan needs to have been repaid. Closed bridge loans have lower rates of interest. If you have a pressing need and you cannot wait for a conventional loan, you should take out this loan for quick cash.
This loan facilitates a speedy investment. When you opt for it, you can make payments on your mortgage and use the remainder to make advance payment when purchasing a new house. The loan is mostly used by developers who want to carry on with projects during the approval process. This is advantageous since most banks do not offer real estate loans. The reason for this is that such loans are risky and speculative in nature. You might have to jump through several hoops to get yourself a real estate loan. To avoid this, you should consider taking out a bridge loan before you get a permanent alternative.
Before you choose any particular lender, you should consider several options. This way, you will be able to get a lender with the lowest rates of interest so that you do not have to pay through the nose. Get a bridge loan today!
Bridge loans are a type of short term credit facility that is offered to consumers who are waiting for approval of long term financing. They can be used for a wide range of applications including real estate, business and personal finance among others. These loans are normally used for temporary or short term financing. When the larger, longer term credit facility is made available, the bridge loan is paid off. These loans have a number of benefits and uses. Read on to learn more.
What to Keep in Mind When Looking for Bridge Loans
Bridging finance is normally more costly than other conventional financing options. Interest rates are usually several percentage points above prevailing market rates. The credit facility must also be secured by some form of collateral. Normally, real estate is used as security for bridge loans. Business owners can also use the current market value of their inventory as collateral for the loan. It is difficult to get a loan whose value is equivalent to the current market value of the collateral. Normally, lenders offer loan-to-value ratios ranging from around 65% to 85%. This may vary from one lender to another.
Who Needs Bridge Loans?
Anyone who has a reliable income source can procure a bridge loan. However, this credit facility is very popular in the real estate industry. Homeowners who want to sell their current home and buy another one can make good use of bridge loans. Selling a piece of real estate takes time, but the homeowner may need a significant amount of money urgently to make a downpayment on another property. The homeowner can procure a bridge loan, using the old property as collateral, and secure the new house. Once the old house is sold, the homeowner can repay the bridge loan.
Business owners can also get a bridge loan to fund their operations. When a firm experiences equity problems due to one reason or another, an equity injection through a bridge loan may help keep its doors open. Other individuals who can benefit from these loans include property developers, distressed homeowners and contractors among others.
Hard Money Loan Vs. Bridge Loans
There are many people who assume that bridge loans are the same as hard money loans. While they may share a lot of similarities, the two are completely different. For instance, the former is offered by private equity firms, individuals and private investors, while the latter is offered by both mainstream and alternative lenders. The repayment period of these two credit facilities range from two weeks to around three years. A bridge loan can either be closed or open. The former means that the term of the loan is predetermined, while the latter means that the repayment period has not been set.
Sometimes in life, people need a small amount of revenue before they can turn a major profit. A contractor may need to make improvements on a home before selling it or a homeowner may need a loan to cover closing costs before they can sell. In these cases, a bridge loan can be of great assistance.
What is a Bridge Loan
A Bridge Loan is short term financing which is typically used to obtain funds until long term financing can be achieved. This is where the term ‘Bridge’ Loan initiated. It gives a borrower a bridge until more traditional financing can be obtained. Bridge Loans are sometimes called swing loans or bridging loans but they perform the same duty. Many large scale real estate projects and corporate acquisitions would be impossible without Bridge Loans.
Real Estate Applications
In real estate, Bridge Loans can be used to secure financing to obtain a property from foreclosure, quickly close on a deal or take advantage of a limited opportunity to purchase. Real estate Bridge Loans are typically repaid after the property has been sold or refinanced by a traditional loan. The interest rates on Bridge Loans are typically higher because they represent a higher risk of default for the lender. Typically, bridge loans carry a hefty 11-15% interest rate and they’re usually about 60-85% of the appraised value of the property. If a real estate developer is looking to start a project and he just needs enough money to break ground until he can acquire the proper permits, he may take out a Bridge Loan. This is a high risk loan for the lender because the structure may never get built. If the developer does get all the necessary permits, he can then seek more traditional financing and use that money to repay the loan.
A board of directors may be seeking to sell a struggling corporation but they don’t have the funds to stay in business until they find a buyer. A bridge loan can be granted until the business is sold and the proceeds will be used to pay off the loan. A company may use a Bridge Loan to secure funds between traditional equity financing.
The applications for Bridge Loans go on and on and they are most definitely an important part of the way companies, realtors and developers do business. Bridge lending is a fairly common practice all across the world as people and companies seek the financing they need until they can turn a larger profit. A Bridge Loan is kind of like a loan for seed money. Seed money is often times necessary to have before a venture can begin but bridge lending provides a way to go ahead with plans even though the seed money may not be available.
Whether you are a home buyer or a real estate investor, you can take advantage of a bridge loan for a very useful purpose. This type of loan allows you to cover temporary financing needed for buying a residential or commercial property. Whether you want to sell, buy or construct, this short-term loan proves very useful. Once you can secure permanent financing then you can clear this loan. There are many reasons why bridge loans have become so popular among buyers and sellers of properties.
All Types of Properties Are Covered
You can borrow a bridge loan for residential or commercial property. When you are buying a new house while you are yet to sell your old home then you may be out of cash to buy the new house. The required fund to buy the new house can come from a bridge loan. This type of funding is also suitable for commercial property buyers and sellers. Homes facing foreclosure are profitable real estate investment but such properties are sold only to buyers who are ready to pay cash immediately. A bridge loan can make a difference in buying or losing such a property. Bridge loans can also be used for properties under construction. The project can be started and completed on time with the help of this loan. Even projects under renovation can benefit from a bridge loan. Businesses undergoing partnership transitions or financial distress are another set of beneficiaries that can benefit from it.
Poor Credit Rating Is Not a Problem
Individuals and businesses facing poor credit rating find it very difficult to borrow a traditional loan. However, poor credit rating is not a problem when it comes to bridge loans. If the lender is convinced of the genuineness of the project and sure of its completion then no impediment is placed in lending this fund. The loan is cleared quickly as soon as the project verification process is complete.
Easy and Quick Approval
Unlike traditional loans that can take weeks or months before the approval comes through, the bridge loan does not take more than 1-2 weeks. In fact, under some circumstances, money borrowed this way becomes available within 24 hours of loan application. Borrowers who do not qualify for such special circumstances can still receive loan fund within two weeks.
Bridge loans do not require the borrowers to comply with strict borrowing rules applicable with most traditional loans. The borrower is free to use the loan fund as required. There are very few restrictions and that is why this type of funding has become so popular among borrowers looking for temporary fund to finance their real estate projects.
It is the flexibility and advantages over traditional loans that have made bridge loans a preferred choice of people dealing in properties.