While bank financing is great for standard real estate transactions, it quickly fails when timing is short or there is anything unusual about the deal. If the bank has failed you, you may need a bridge loan.
What is a bridge loan?
A real estate bridge loan is short-term, temporary financing used to bridge the gap between buying a property and either selling or refinancing it. Bridge loans are usually six months to one year in length and must be paid off at the end of the term. They are usually interest-only loans meaning that monthly payments do not pay down the principal. Bridge lenders usually charge a minimum amount of monthly interest or have pre-payment penalties if the loan is paid off before a certain time (3-6 months is normal). Typically bridge loans will be at a higher interest rate than traditional bank financing.
Is a bridge loan the same as a hard money loan?
Essentially yes, a bridge loan can be classified as a hard money loan. It’s a loan based primarily on property value with interest-only payments and a short term. These loans are usually made from private lenders whose money is sourced from funds, foundations or individual investors.
Little City Investments is a direct hard money lender and not a broker. We provide fast, easy bridge loans for properties in Texas. Apply for a bridge loan today.
Why would I need a bridge loan?
There are too many reasons to count why you would need a bridge loan but the major reasons come down to the things that banks don’t do well: speed, lending to borrowers with less-than-perfect credit, and funding transactions that are unusual in any way.
Speed is one major reason for bridge loans. If you must close quickly for whatever reason, you will need a bridge loan which is significantly faster than bank financing.
Borrower qualifications are another reason to go with a bridge loan. Banks will dig deep into your DTI, bank accounts, assets, credit, etc. But bridge loans are asset-based and much more focused on property value. If you have a marginal financial situation, a bridge loan will be your best bet.
Unusual deals are another reason for bridge loans. Maybe the property is in poor condition and won’t appraise. Or maybe it’s raw land or a weird use. Maybe the seller won’t let anyone on the property. The reasons go on and on, but you’ll know after a few banks turn you down.
At Little City Invesetments, we lend on almost all property types: single-family, multi-family, commercial and raw land. Our minimum credit score is much lower than banks. Learn more about our hard money loans.
Is there any reason not to get a bridge loan?
If you don’t have a viable exit strategy, i.e. a plan on how you are going to pay off the loan, then you should not get a bridge loan. Lenders will ask you for your exit strategy, and they must be confident you can achieve it. If you are planning to hold the property long-term, how confident are you that you can refinance? If you have bad credit now, will it be better in a year? If you’re planning on selling the property, how confident are you that it will sell for enough? Are you willing to sell the property at a discount as a last resort? Getting a bridge loan without a viable exit strategy can cost you the property along with the costs of the loan. So be careful.
Can I get a bridge loan on my home?
The short answer is “no,” you can’t get a bridge loan on your homestead or a property you plan to live at. The reason why is that bridge loans are essentially hard money loans. Hard money lenders choose not to make these loans because of strict federal regulations on homestead and mortgage lending which make compliance and foreclosure much more difficult. Bridge loans are considered “commercial” loans because they apply to all other property types besides homesteads and are for business purposes only.