One of the lesser used strategies in real estate is the bridge loan. Bridge loans provide a viable alternative to buyers who are looking to upgrade a home in an expeditious manner, and it may be the technique for you. Here are some of the major questions that you should ask yourself if one of your real estate professionals suggests a bridge loan for your real estate needs.
1. What exactly is a bridge loan?
A bridge loan is a loan that connects the gap between receiving money from a home sale and buying a new home. Bridge loans are used most often when a buyer in a new market has not yet sold his current primary residence.
The bridge loan uses the buyer’s current property as a security. Once that house sells, the funds from that loan are put towards the down payment on the new home the buyer wants.
2. How long does a bridge loan’s term last?
A bridge loan is meant to be temporary, so the term is relatively short. There are very few set guidelines or industry standards for a bridge loan; truthfully, many bankers are playing this one by ear. As such, the term period for a bridge loan may vary. Usually, the term will be no more than a year, because everyone involved expects the buyer’s current home to sell by then. Most lenders will offer a six month term to a borrower initially; however, here are some lenders who will offer bridge loan terms of up to seven years, however.
3. Why would I pick a bridge loan?
Certain property markets are more conducive to bridge loans than others because of the buy and sell flow of property within those markets. If you are advised that your home may take longer than you think to sell, then you may be a good candidate for a bridge loan. A bridge loan will also keep you from having to borrow money completely outside of the auspices of your current real estate dealings, a process that can quickly become confusing and expensive.
There are certain instances that may require the use of a bridge loan, most of them having to do with the time that it takes to close escrow on a commercial property. However, apartment complex owners may also utilize a bridge loan in the time period between buying a multiunit construction and finding that first renter. Developers also use bridge loans in order to complete projects in a timely manner if equity financing does not come through for some reason. Buyers, especially in the fast moving foreclosure market, will also use bridge loans to buy properties that they do not have the immediate funds to purchase.
4. Does a bridge loan have any limitations that I should know about?
The primary limitation that concerns most people is the relatively short term of the bridge loan. Lenders give extensions at their discretion, however, extensions are usually only for a few months, not years.
There is also usually a limit on the amount of money that a borrower can have. Lenders will often max out at the 80 percent loan to value mark; however, most of them will only allow 65 percent.
5. How do I qualify for a bridge loan?
If you ask five lenders, you will likely get five different sets of requirements. However, there is one major difference between qualifying for a bridge loan and qualifying for other loans: While traditional loans are based on credit and consistent creditor payments, the bridge loan is usually based on the collateral that is being used.
Because the bridge loan is being secured by a property, your credit record is less important to the lender. Most people who are using a bridge loan are already in the middle of buying and selling property, so their credit records have already been vetted. What is important to the lender with respect to a bridge loan is the value of the property that is securing the loan, the after repair value (ARV) of a property that the loan is being used to upgrade, and the current loan to value ratio of the property.
6. What are the terms of a bridge loan?
The normal term for a bridge loan is six months, and there are certain fees associated with its origination. These fees will differ from every lender, but market rates seem to be around one quarter of one percent of the total home value securing the loan as a fee to the lender to originate the loan. There may be additional fees for commercial lending partners.
7. What are the disadvantages of a bridge loan?
The fee structure can become quite expensive compared to other types of loans. If a borrower asks for an extension, the interest rate is also usually quite expensive.
8. What real estate actually qualifies for bridge loan use?
All real estate qualifies as long as the lender approves; however, it is mostly used for commercial properties.
9. How do I receive monies with a bridge loan?
Borrowers may not receive money directly with a bridge loan. If a property is securing the loan, the funds may go directly to the escrow account of that transaction. In the case of property development, the lender may pay the borrower directly or send the money directly to the contractors.
2 Point Highlight
Buyers, especially in the fast moving foreclosure market, will also use bridge loans to buy properties that they do not have the immediate funds to purchase.
What is important to the lender with respect to a bridge loan is the value of the property that is securing the loan, the after repair value (ARV) of a property that the loan is being used to upgrade, and the current loan to value ratio of the property.
