Real estate market deals often ride on timing—it’s common for new property buyers to feel the pressure to buy or source funds for a property quickly. If you’re looking for reliable solutions for immediate funding, bridge loans are the answer. They are easy to get and can be used in a variety of scenarios to bring in cash flows efficiently.
Navigating bridge financing can be overwhelming for first-time borrowers because it does not operate on the same wavelength as traditional financing. Use our practical guide to get acquainted with all realistic aspects of these loans. We will explain:
- How a bridge loan works
- How to qualify for a bridge loan
- Where to get a bridge loan suitable for your situation
Bridge Loan—Definition and Purpose
A bridge loan can be defined as any interim funding arrangement that helps the borrower meet pressing financial obligations while a long-term funding solution is being secured. Bridge financing (also called gap, interim, or temporary financing) can be obtained for two weeks to three years, depending on the application, and requires collateral to act as security. Since it’s an asset-backed loan, the paperwork is generally light. You need to pay a higher interest rate than for traditional loans, though, as lenders tolerate a greater risk exposure while underwriting bridging products.
These loans were originally used by companies to generate working capital (often by leveraging inventory) upon facing bureaucratic delays in bank financing. Over the years, bridge financing has become popular among all kinds of borrowers with liquidity problems. It is frequently used by:
- Commercial borrowers for various business needs
- Startups requiring seed capital
- Contractors who need to forward construction (while they wait to acquire permits and other qualification essentials for bank loans)
- Property investors and home buyers for solidifying good deals
What Is a Bridge Loan in Real Estate? Meaning and Examples
A bridge loan builds the figurative bridge in any real estate transaction, getting the borrower from Point A (the purchase emergency) to Point B (the moment the borrower acquires the intended cash inflow to meet the obligation) without any headache. It’s designed to be a time-conscious, low-maintenance loan product with features like:
- Interest-only payments—Bridge lenders are aware from the get-go that the borrower will refinance, so they ask for interest-only payments to avoid complicating the deal. The principal sum is due as a balloon payment at the end of the term
- Early closing—Most lenders charge hefty penalties or fines if you close the loan before maturity to compensate for the loss in yield. Bridge lenders have little to no prepayment penalties because the loan is short-term to begin with
Bridge financing serves more like a liquidity instrument in the toolkit of property buyers, allowing them to have a more opportunistic approach in the competitive housing market. Property investors also use terms like “bridge mortgage loan” or “swing loan” to refer to this form of financing. Let’s get a hands-on overview of how it works.
Source: Vanessa Garcia
The Functionality—How Does a Bridge Loan Work in Real Estate?
Let’s say you find a hot property for sale—you can afford to pay for it in the future, either by acquiring a mortgage or selling your current home, both being time-consuming activities. The property will likely be gone if you keep waiting, and that’s where bridging comes in. You find a lender and offer them qualifying collateral, which can be:
- Your existing home
- An investment or rental property
- A non-real estate asset
- The property you intend to buy
If your request goes through, the lender will fund your purchase deal. You put down the interest payments for a few months and pay off the loan once you refinance with a mortgage or finalize the sale of your existing home, as the case may be.
More Sample Scenarios
Check out four other scenarios where bridging may be useful:
- Improving creditworthiness—If a borrower doesn’t qualify for conventional financing due to a steep debt-to-income (DTI) ratio, pending tax returns, or other deal-breaking factors, they can get a bridge loan to facilitate a deal while simultaneously working on reinstating their credit standing
- Fixing and flipping houses—Bridge loans are a part of the business model for house flippers who rely on getting cheap properties quickly to have a larger profit margin after recouping interest payments
- Avoiding a double-move—If you sell your current home before you get a new one, you have to manage a temporary housing situation. You essentially pay for moving expenses twice, plus the additional monthly rent. Getting a bridge loan allows you to stay in your current home till you’re ready to move into a new one, so you save on the extra moving costs and rent
- Removing contingencies from a purchase offer—Property sellers tend to reject the candidacy of applicants who present purchase offers with home sale contingencies. A bridge loan will help you make a solid offer unburdened by such clauses, so you’re more likely to qualify
Many real estate buyers also consider bridge loans because they don’t want to sweep their savings clean only to make a deal happen.
Source: Towfiqu barbhuiya
How Much Can You Borrow on a Bridge Loan?
Unlike conventional lenders, bridge financiers focus more on the value of the collateral than a borrower’s creditworthiness to determine the amount you can borrow. The decision usually depends on the following two factors:
- Equity in collateral—You must have at least 15%–20% equity in the property you offer as collateral. The lender may also investigate the existing mortgage on the property and the implications of cross-collateralization (if any). Most bridge lenders are okay with having a second claim on the collateral (after the primary mortgage), while some may offer a cash-out refinance option to establish a first claim on the house
- Loan-to-value (LTV) serviced by the lender—Lenders typically offer around 70% LTV for bridge loans. For example, if you hold $200,000 equity in the property, you can extract about $140,000 (70% of $200,000) for bridging. Some lenders may offer LTVs higher than 90%, provided you bring them an insanely attractive real estate deal and are ready to pay higher-than-average interest rates
Keep in mind that lenders may have different standards for calculating borrowing limits, which are often negotiable.
What Is the Cost of a Bridge Loan?
The cost of a bridge loan will vary from lender to lender. Consult the following table to get an idea of the interest and closing costs you can expect:
|Interest||Bridge loans generally have 1%–5% higher interest rates than standard long-term mortgage rates. On average, you can expect an annual interest rate between 8% and 14%, but lenders who provide over 90% LTV coverage can charge up to 22%|
|Closing costs||The administrative costs on a bridge loan are the same as regular loans. You may have to pay $1,000–$2,000, depending on the state you live in, for charges like:|
• Admin fee
• Appraisal fee
• Title work expenses
• Transaction charges
• Notary fee
• Escrow fee
• Retainer fee
Besides these charges, bridge lenders dictate 1.5% to 5% as origination (processing) fees
Bridge lending is a competitive business operating within state laws, so request quotes from 4–5 lenders in your local market to get average figures relevant to your area.
Who Offers Bridge Loans for Real Estate?
A bridge loan doesn’t qualify as a standard mortgage product, so not every traditional bank and credit union provides this type of financing. Bridging solutions are primarily offered by alternative real estate financiers like private mortgage companies and hard money lenders. These lenders are known to specialize in non-qualified mortgage (non-QM) loans, i.e., loans that do not meet the inflexible lending guidelines of the Consumer Financial Protection Bureau (CFPB).
An average borrower starts by asking about real estate bridge loans at their regional bank before considering alternative lenders, which can take up a lot of time. We’ve presented both options below to help you evaluate what would work for your situation.
Source: Nataliya Vaitkevich
Bridge Loan Financing—Qualifications Specified by Banks
Banks may look like the comfort zone for first-time bridging users, but finding conventional lenders willing to offer short-term housing finance is not easy. Most banks supply short-term funds only to businesses they regularly work with—offering such services to homeowners would unnecessarily block their funds.
From what borrowers have shared, your best bet is to reach out to your local bank and see if they’re open to non-QM funding. If you’ve had a good relationship with the lender, they may provide you with bridge financing, provided you fulfill the following requirements:
- Display an excellent credit score (usually 680 and up)
- Keep a low DTI ratio
- Have a stable and secure source of income
Some banks may also suggest going for their other products instead, e.g., a personal loan, which is an unsecured loan with interest rates as high as 20%—not exactly a great alternative to a bridge loan.
Qualifying for a Bridge Loan With an Alternative Lender Is Easier
If you want hassle-free bridge loans, choosing an alternative lender is the most sensible route to take. Among alternative lenders, you’ll find a few private mortgage companies online offering bridging facilities, but they may reject short-term funding requests if they choose to prioritize long-term mortgages.
In general, hard money loans are considered to be tailor-made for bridge funding as they are short-term and completely backed by collateral. Many hard money lenders specifically cater to real-estate borrowers who require immediate funding, often offering a variety of bridge loan packages to suit different needs.
Most hard money lenders don’t scrutinize a borrower’s credit standing while dispensing bridge loans as long as the collateral is healthy. The loan will get through if the lender finds the deal eligible and attractive in terms of:
- Profitability or interest yield
- Exit/repayment strategy
- Risk variables
Remember to do your basic due diligence before choosing any private lender. Go for financiers who have extensive experience with bridging and good customer ratings.
Source: Austin Distel
Hard Money Loan Solutions Makes the Best Bridge Loans Available for Everyone
Don’t let a shortage of funds keep you away from the property you desire. Get bridge financing from the best—Hard Money Loan Solutions (HMLS) provides customized bridge loans to suit your homeownership or investment needs. The group also offers bridging facilities for various commercial scenarios, such as business buyouts or asset purchases. Present your situation to an HMLS loan officer and get a free consultancy from experts!
The Florida-based lending group follows a careful collateralization-based approval process—so you’re funded solely on the merit of your collateral. Even borrowers with poor credit scores or non-U.S. status can apply. Check out some of the major benefits of an HMLS-enabled bridge loan:
- Flexible loan structure—HMLS lenders are industry veterans who’re aware that the same loan structure doesn’t work for all borrowers. With that in mind, they customize loan packages keeping a client’s exit strategy in mind
- Transparent processing—You can expect direct, unfiltered communication from the team. They focus on:
- Answering clients’ questions with clarity
- Revealing all lending terms upfront
- Minimal paperwork—The documents required for an HMLS bridge loan are situation-specific. In most cases, you need to provide your property paperwork, but the lenders may also want to see your construction plan if you’re rehabbing or remodeling
- Reliable funding—HMLS lenders value the integrity of commitment and never turn their back on a loan once approved
- Low interest rates—Hard money lending is an incredibly competitive industry, but HMLS keeps its interest rates lower than most competitors
How Long Does It Take To Get a Bridge Loan From HMLS?
If you have an eligible deal, HMLS can give you access to funds within 3–14 days. You’ll get the cash quickly if the property has been recently appraised, you have already thought out a repayment plan, and your documents look problem-free. On average, most HMLS clients get funded within ten days. The group strives to allot time-sensitive funding even in hard-to-lend scenarios, which is one of the reasons why HMLS has a stellar 5-star rating on Google!
Besides bridging solutions, you can also apply to HMLS for the following tailor-made loan packages:
- Property rehab
- Refinance or cash-out refinance
- New construction and reconstruction
- Bank foreclosed and REO (real estate-owned) properties
- Short sales
- Fix and flip
- Residential properties
- Land acquisition
- Commercial projects
The table below will give you the specifics of the various lending parameters at HMLS:
|Loan Parameter||HMLS Loan Package|
|Principal||$100,000 to $50,000,000+|
|Installment type||Interest only (no amortization)|
|LTV offered||Up to 70% of the lower of:|
• Current property value
• Purchase price of the new property
|Origination fee||2 points or 2%|
|Prepayment penalty||No (if repaid after six months)|
|Down payment||Not required|
If you’re number-crunching, use HMLS’s interest-only calculator to get a rough idea of your periodic obligation on a bridge loan.
Source: Gustavo Fring
How To Apply for a Bridge Loan at Hard Money Loan Solutions
You can drop an HMLS loan application online, and an available loan officer will look into your case right away. Here’s what the process looks like:
- Navigate to the HMLS quick-start loan application page
- Enter the following details:
- Name and contact address
- Corporate or business info
- Property address
- Requested loan amount
- Add situation-specific comments (if desired)
- Submit the application
An HMLS team member will call you to verify the details provided and enquire further, if necessary. If the property appraisal makes sense according to the amount requested, you’ll likely be approved.
Hard Money Loan Solutions follows a customer-centric approach across all transactions. The team is professional, friendly, and considerate to all applicants. Should you face problems while repaying a bridge loan down the line (which is a possibility), you can talk to the lending team to chalk out alternate repayment strategies.
Are There Viable Alternatives to Bridge Loans?
Bridging products are well-suited for short-term transactions, and while you have alternatives, their viability depends on your personal situation. We have explored some common options in the following table:
|Traditional home equity-stripping loans||If you want to recycle the equity in your current home, you can also opt for traditional equity-stripping products like:|
• Home equity loans—usually long-term with interest rates higher than conventional mortgages
• Home equity line of credit (HELOC)—a credit card-like arrangement to draw out funds up to the equity holding in your home (interest rates are generally high and calculated at the time of each draw)
|Collateralization of financial assets||You can get loans against financial assets like 401(k) plans and stock holdings. In most cases, the lender will not scrutinize your creditworthiness, but they typically offer only up to 50% of your vested interest in the asset|
|Sale of home to property flippers||If you’re selling an old home and want to wait for the best offers, you can consider getting quotes from professionals or companies who engage in house flipping. They offer competitive quotes and may even allow a short-term lease after closing, in case you want to live in the property for a while|
If you’re in two minds or have any other questions about bridging, contact Hard Money Loan Solutions to get a realistic assessment of your deal from seasoned property investors.
Featured image source: Tierra Mallorca