Understanding the Difference Between Bridge Loans and Gap Financing

by HMLS

If you’re looking for financing, but a traditional mortgage or business loan doesn’t fulfill your needs, then you should consider hard money loans. These are provided by third-party lenders such as HML Solutions and offer more flexibility than bank financing.

Of course, there are many types of hard money loans, some of which have overlap. Two popular options that share similarities are bridge loans and gap loans. However, the differences are significant, and each has a particular use.

What Is a Gap Loan?

First, let’s talk about first and second liens. When you put an asset, such as a building, up for collateral, the lender puts a lien against the asset. Should you default, the lender will get the collateral as compensation.

If you need funds but already have a lien on an asset, it’s possible to get a second loan and, therefore, a second lien. However, not all lenders are willing to do this, as the first lienholder gets priority should the borrower default.

Gap loans are specifically designed for secondary borrowing. They fulfill the “gap” between the money you have and the amount you need.

What Is a Bridge Loan?

Bridge loans are almost always in the primary lien position because they’re high-risk to the lender. A bridge loan is specifically for short-term lending and therefore lasts between 18 months and two years. The expectation is that the borrower will pay the loan off within that time frame with profits from a business venture or asset sale.

This type of financing “bridges” the gap between today’s needs and tomorrow’s profit. Businesses and investors frequently use these loans to fund short-term projects, but they can also be used for personal endeavors, such as purchasing a home.

When Should You Use a Gap Loan?

Gap loans are incredibly flexible so that they can be used for many purposes, including:

  • Paying for permits and licenses
  • Paying for materials
  • Paying for contracted labor

Since they’re specifically for secondary liens, you shouldn’t look for a gap loan if you don’t currently have financing. Instead, you should seek out other hard money financing options, such as a bridge loan. However, if you’ve used funds from a loan and have come up short, it’s the perfect situation for a gap loan.

When Should You Use a Bridge Loan?

Bridge loans are excellent for situations where you need short-term financing and expect to earn the debt amount shortly. Examples include:

  • You want to buy a new house, but your old one hasn’t sold yet
  • You want to invest in a good business opportunity but are low on cash
  • You want to refinance your current mortgage but don’t qualify for a traditional loan

Property investors also often use this type of financing to purchase and rehab properties they then rent or sell. They choose a bridge loan because it’s faster than waiting for mortgage approval, and they don’t intend to keep the property long-term.

Where Can You Get Alternative Financing?

If a gap or bridge loan sounds like the solution to your working capital needs, then it’s time to call HML Solutions. Our representatives are happy to help you find the perfect financing option. To learn more, call us today.

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