Bridge loans are often used by home buyers who, while in the process of selling their older home, use the loan as a down payment on their new home. Once their older home sells they pay off the bridge loan.
But bridge loans are also used by real estate investors who buy and sell residential and commercial properties. Investors use these short term loans as an advance to help them with the expenses of redeveloping a property. They often pay off the bridge loan when they flip the project, or refinance it with a long-term traditional bank loan once the property is rehabbed.
Since traditional banks focus on long term mortgages to low risk properties, most real estate investors benefit from these alternative type of financing because they provide quicker funding and more flexible guidelines for approval. Mortgage banks will not normally finance major fixers, while bridge loans do.
The additional money bridge loans provide allow investors more diversification with their personal funds. And bridge loans allow you to approach a deal as if your buying it cash since loan contingencies are not strict like regular mortgages. This helps your negotiating power when making the offer to the sellers.
Also, many bridge financing lenders will not require any payments for a specified time, giving you the breathing room to use the cash on the development.
Bridge loans do come with their own drawbacks. The interest rate is higher, about 4-8 percent higher than regular mortgages. The terms are often 3-18 months, so there is expectation for your project to complete on time. The points upfront can vary depending on which lender you speak to, as well as your experience in the real estate field: the more experience, the more you are deemed less risky, so the interest rates are lower.
Bridge loans are typically in first position lien on a property. The loan to value lenders provide is 30-60 percent, so you either have to have the rest as cash down payment or a secondary loan to close the transaction.
If you are currently in a real estate deal, and considering extra funding, discuss your situation with several bridge financing lenders as each will go with you through the numbers to see what makes sense.