Beginner's Guide to Bridge Loans
If you're buying property in California but have not yet sold your house, a bridge loan can help. As residential bridge loan lenders explain, these loans are short-term financing, typically for no more than 12 months. Here's a look at important things for beginners to know.
A Variety of People Can Use the Loans
Whether you're moving to a new home, want to flip a property or are an investor adding to your portfolio of properties, you might qualify for a bridge loan. The loans can be for single-family homes, industrial properties, apartment buildings and more.
Same Loan, Different Names
Bridge loans go by a variety of names, including swing loan, interim financing, bridge mortgage and caveat loan. Regardless of the term used, they are a quick and flexible financing option.
They're Hard Money Loans
Bridge loans are hard money loans, meaning that they are asset-based. For example, Los Angeles hard money lenders will typically not worry too much about a borrower's credit score or credit history. What matters most is the value of the property the borrower puts up as collateral.
Loan Amounts Vary
A bridge loan can be for $25,000 or for many millions of dollars. It depends on the collateral.
Loan-to-Value Ratio May Be Up to 75%
Borrowers in California can generally get funded for up to 75% of the value of their collateral. The number isn't 100% because hard money loan lenders do want borrowers to have an incentive not to default. They're less likely to default if they've put up 25% of their own funds.
The Loans Can be Risky for Lenders
Bridge lenders tend to be private companies or private individuals, not banks. The risk with this type of loan can be high since borrowers with various credit histories are accepted. For example, some borrowers have subpar credit histories but still qualify for bridge loans due to the equity they have in their property.
They Come with Tradeoffs for Borrowers
Borrowers usually pay a higher overall cost for a bridge loan, but the tradeoff is quick funding and more flexibility with repayment. Also, lenders typically assess each loan application based on its merits.
Here's one example of a benefit. Take the case of people who are selling their homes and looking to buy new homes. Without a bridge loan, they'd likely have to move into temporary housing such as an apartment after they finalized the home sale. They'd move out once they bought a new home, but that means moving twice. A bridge loan means moving only once. That's incredibly convenient and can be cost-effective in the big picture.
Borrowers do have to contend with higher interest rates (8% to 10% interest rates are typical) and higher transaction costs. Bridge loan origination fees can be two points, and there are escrow, title, recording and other fees.
Payoff Strategy Is Planned from the Start
The path to paying off a bridge loan tends to be clear from the start. For example, a property flipper would use proceeds from the sale of the flipped property to pay off a bridge loan. Get in touch with a lender today if a bridge loan could work for your situation.