Trying to secure financing for your new real estate purchase can be frustrating and confusing. This is especially true in a market that seems to be moving faster than the speed of light. If you’re sick of missing out on exceptional properties due to traditional financing options that are restrictive and time-consuming, you may want to consider alternative lending options like bridge loans. A bridge loan could be the financing solution you’ve been looking for that will help you beat out the competition and secure the perfect investment property.
What Is a Bridge Loan?
A bridge loan is a short-term loan option that provides applicants with quick access to the funds they need to purchase a property. Frequently, applications for traditional loans through lenders like big banks can be extensive and time-consuming. And with a real estate market moving faster than ever before, sometimes you simply don’t have time to wait for that financing to come through if you want to make a move on the perfect property.
This is where bridge loans come into play. This loan solution provides you with the cash you need until you can secure permanent financing. They typically involve a lending timeframe of one year, although these may be extended to three years in special circumstances. Bridge loans are a popular option with large corporations looking to finance multi-million dollar real estate purchases, but they can also be helpful for local real estate investors.
How Does a Bridge Loan Work?
When using a bridge loan to finance the purchase of a new home while waiting for the current one to sell, most lenders will allow you to borrow up to 60% of the value of the property that will serve as collateral for the loan. Using a bridge loan gives you a leg up on competing borrowers by avoiding contingencies based on the sale of your current property. In an increasingly competitive market, you need all the help you can get!
Using a bridge loan could also be an excellent option for foreign investors looking to purchase property in the United States without the typical documentation needed like W-2s, income tax returns, 1099s, credit reports, etc. As a result, bridge loans make financing more accessible for foreigners due to different qualifications and requirements. 
How Does a Bridge Loan Differ From a Traditional Loan?
A bridge loan differs from a traditional loan in a few different ways. For starters, bridge loans often have different application requirements when compared to traditional loans. Most traditional loans from big banks only look at your yearly income and your credit score to determine your eligibility for a loan. On the other hand, bridge loans consider additional factors like collateral that you can use to secure the loan effectively.
Additionally, bridge loans can usually be processed and completed much more quickly than traditional loans due to the temporary nature of this type of financing. The right bridge loan lenders understand the time constraints within the real estate market and are able to review and complete your application promptly so that you can make a move on your property.
What Are the Pros and Cons of a Bridge Loan?
To make the best financial decision regarding the purchase of your property, you need to understand the pros and cons of bridge loans. In most cases, the pros outweigh the cons, but it’s important to discuss both.
The pros of bridge loans include:
- Bridge loans offer flexible rate options so that you can choose the best choice for your unique situation. For instance, you can choose between a fixed rate or a variable rate.
- Bridge loans offer lower interest rates than hard money loans that are commonly used to get cash fast. You can expect to pay anywhere between 7.5% and 10% in interest for a bridge loan.
- Bridge loans don’t have prepayment penalties -- allowing you to repay the loan at any time without being charged any fees for doing so. This is because a bridge loan is designed to be a short-term option that borrowers should pay off as soon as possible.
- Bridge loans offer more flexible requirements in terms of qualifications. As a result, those who may not qualify for a traditional loan may be eligible for a bridge loan.
Should You Get a Bridge Loan?
If you’re looking for quick and temporary financing to help you compete in today’s crazy real estate market, a bridge loan could be the right option for you. This is especially true if you’re a foreign investor looking to purchase properties within the United States or if you’re an individual looking to buy investment properties.
Finally, bridge loans can be an excellent option for developers and large corporations looking to make multi-million dollar real estate purchases for new headquarters or office space. For instance, Tricera Capital used a $20.3 million bridge loan to fund the purchase of 11 acres of land in West Palm Beach for a mixed-use retail and office project called “The Press.” This is just one example of how a bridge loan can be used for anything from a single-family home purchase to purchasing acres of land for commercial development.
How to Find and Apply for a Bridge Loan?
While bridge loans may be the loan option you’ve been looking for, they aren’t available everywhere. Not all lenders offer this type of financing, but Vaster Capital is the premier bridge loan provider in the South Florida area and can help you secure the property of your dreams using beneficial financing. Instead of looking high and low for a lender that offers this type of financing, Vaster Capital is ready and willing to help you apply and get you your money in no time.
If you’re a qualified individual looking to finance a commercial real estate project quickly, Vaster Capital has loan options that are right for you. They are here to guide you through the process from start to finish -- from your application to your closing. In fact, the entire process can take seven business days!
Speaking of applications, the process is extremely easy with Vaster Capital. We use three factors to qualify you for a bridge loan: collateral, borrowing entity, and your financial strength. As a result, it may be easier for you to qualify for a bridge loan based on these factors rather than a traditional loan that only cares about your income and your credit score. That being said, we will still run your credit and take negative credit events into account. However, we consider the whole picture of your application rather than just your credit score and your W-2s.
At Vaster Capital, we know that the real estate market moves fast, which is why we will move quickly on your application and get you a response within 24 hours. From there, you will send in the required documentation and get your final approval. If you’re looking to speed up the process, make sure to prepare your documentation ahead of time and have it handy to send over as soon as you’re approved. With the right amount of planning and dedication, you can have your money and the keys to your new property in seven business days, thanks to Vaster Capital.
The Rundown on Bridge Loans
Bridge loans are an alternative lending solution that can help you secure your dream property — whether it’s a single-family home or an office park. In fact, bridge loans are ideal for real estate investors looking to get money quickly and secure commercial, multifamily, or office properties. However, they can also work for foreign investors looking to purchase properties in the United States. Overall, with a lender like Vaster Capital, bridge loans can help make your real estate dreams a reality.
Bridge Loan Glossary
Bridge loans can be difficult to understand if you don’t have the correct information. With this unique glossary, Vaster can help you understand bridge loans and why they are unique.
Here are some of the terms you can expect to come across when searching for and securing a bridge loan.
1. Annual Percentage Rate (APR)
The annual percentage rate or APR refers to the annual cost of a loan for a borrower. Contrary to popular belief, APR differs from your basic loan interest rate. This is because APR includes other components, including mortgage insurance, closing costs, and other fees to reflect the total cost of the loan.
2. Bridge Loan
A bridge loan is a unique short-term loan designed to bridge the gap between closing and securing permanent financing. This type of loan allows buyers to remain competitive in a fast-paced market. This is because lenders usually process bridge loans more quickly than other types of loans.
Bridge loans usually need to be repaid with permanent financing within a year or so. Bridge loans come with interest rates that can range from 6% to 12%. Bridge loans are unique loan products that not every lender offers. However, premier lenders like Vaster typically provide bridge loans with favorable terms.
3. Closing
Closing refers to the last step in the real estate buying process wherein the deal is closed, the documents are signed, and the money changes hands. More often than not, the buyer and/or seller must meet certain conditions or contingencies before closing is officially complete.
4. Closing Costs
Closing costs are costs associated with the processing of your loan. Different closing costs include title search fees, appraisal fees, credit report fees, title insurance, discount fees, origination fees, etc.
Different lenders handle closing costs differently, so it is important to shop around with multiple lenders to get the best possible terms. Generally speaking, you can expect to pay between 3% to 6% of your loan value in closing costs.
5. Collateral
Collateral refers to assets the borrower uses to help qualify and secure a real estate loan. Putting up assets for collateral decreases the risk taken on by the lender and is a good option for buyers that may not qualify based on traditional qualifications, such as income or credit score.
6. Comparables
Comparables are used during the appraisal process to determine a property’s value. These properties have approximately the same size, location, and amenities as the property in question. They also must be in the same general area and have been sold within the past three months.
However, this depends on the asset type and the number of sales. At Vaster, we prefer recent sales but commonly go up to a year back for condos and single-family homes. For land comparables, we often look back multiple years.
7. Contingency
A contingency is a condition that must be satisfied to close a real estate deal. For instance, one of the most common contingencies is that the property must pass an inspection. Another common contingency is that an appraiser must appraise the property at a value equal to or greater than the purchase price.
8. Credit Score
A credit score calculates your creditworthiness based on various factors, including payment history, types of credit, length of credit history, credit mix, and amounts owed. This score ranges from 300 to 850. Anything below 600 is usually considered a “poor” score, and anything above 720 is considered a “good” score.
Lenders use your credit score to determine if you’re eligible to borrow money. From there, they also use it to determine your interest rate — with those who have good credit scores getting the lowest interest rates since they present lower risks to the lender.
9. Debt-to-Income Ratio
Debt-to-income ratio is an important calculation you can use to determine if you are eligible to borrow money. Also known as DTI, this ratio adds up all your monthly debts compared to your monthly gross income.
An ideal DTI falls below 36%, with no more than 28% of debt going toward housing costs. So essentially, your debts unrelated to housing should be no more than 8% of your gross monthly income. If you have higher debts, you will not be eligible to borrow a large loan amount to purchase a property.
10. Escrow
Escrow is a type of account used to store funds related to buying a property until closing. This is to make sure that all conditions of the closing have been met before the funds are released.
In addition, escrow accounts are also used to store funds related to property taxes and homeowners insurance after closing. This is because these items are charged on an annual basis and can cost thousands of dollars. So instead of paying one lump sum, you pay into your escrow account every month to make the process easier.
11. Homeowners Insurance
Homeowners insurance is a type of insurance policy that covers your property in the event of damage from things like natural disasters (hurricanes, tornadoes, earthquakes, fire, etc.), theft, or vandalism. Many lenders require that you maintain a homeowners insurance policy while you’re paying off your loan.
Insurance rates vary depending on the size, location, and features of the property.
12. Interest Rate
The interest rate is the rate that the lender charges the borrower in exchange for letting them borrow their money. An interest rate helps mitigate some of the risk taken on by the lender. For that reason, they determine your interest rate based on how much of a risk you present.
For instance, you will likely get a low interest rate if you have a high down payment, a good credit score, and a solid income history. On the other hand, you will likely get a high interest rate if you have a low down payment, a poor credit score, and a patchy income history. Keep in mind that seemingly small variations of one-tenth of one percent can make a huge difference in your monthly payments and the overall cost of your loan.
13. Investment Property
An investment property is a property that is purchased for investment purposes rather than residential purposes. There are many different things that you can do with an investment property. For instance, you can buy a property, repair it, and sell it right away. You can also purchase a property, repair it, and rent it out for a long-term investment.
Securing a loan for an investment property is different from securing a loan for a residential property. Rates are often slightly higher for these loans. They also come with stricter qualifications in terms of credit scores, down payments, and debt-to-income ratios.
14. Lender
A lender provides you with the money you need to purchase a property if you cannot cover the entire purchase amount on your own. Covering the full amount — usually hundreds of thousands of dollars — can be difficult or even impossible for many. Thankfully, lenders are willing to provide you with the financing you need to close on a property.
From there, you pay them back every month — plus the cost of interest. After all, lenders aren’t just going to provide their services for free — they come at a cost. This is because lenders always run the risk that you won’t be able to repay your loan, in which case they would move forward with foreclosure.
15. Loan Term
The loan term refers to how long it will take to pay off the loan. Loan terms can vary depending on the type of loan. Bridge loans usually come with shorter terms ranging from one year to about 18 months since they aren’t designed to be permanent financing solutions.
On the other hand, conventional loans often come with longer terms so that payments are lower. The most popular term for a conventional loan is 30 years, although there is usually an option for a 15-year repayment term.
16. Mortgage Broker
A mortgage broker is a professional who acts as a middleman between borrowers and lenders. They work with several lenders to offer buyers a more comprehensive range of loan products that are more likely to meet their needs. They can also help buyers negotiate better rates and terms for property loans. Similar to real estate agents and loan officers, mortgage brokers work off commission.
17. PITI
PITI consists of principal, interest, taxes, and insurance. Together, these four components make up the total amount of your mortgage payment. Principal refers to the amount that you borrowed to purchase the property. Interest refers to the extra amount that you pay the lender every month or year.
Taxes refer to the property taxes you’re required to pay. This is an annual cost, but you can set up an escrow account and pay into it monthly, so it is not a single unmanageable bill. Insurance refers to homeowners insurance that lenders often require and covers the cost of property damage in the event of damage from natural disasters, theft, and vandalism.
18. Pre-Approval
A pre-approval indicates that you are qualified to receive a loan before you find a property. If you want to be taken seriously during the buying process, you need to get a pre-approval from a lender. First of all, it helps you get a good idea of what you can afford to purchase as you’re pre-approved to borrow a specific amount based on your income.
Furthermore, it helps show sellers that you’re serious and that you’re able to secure financing for the property — making you a less risky contender who is more likely to win the property when compared to buyers without a pre-approval.
19. Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is an extra cost associated with using a conventional loan to purchase a property. Buyers who cannot put a 20% down payment on a property are charged PMI since low down payments are risky for lenders.
PMI is usually paid monthly and is added to your monthly mortgage payment. You can also choose to pay for PMI with a one-time lump sum at the time of closing. PMI can substantially increase your housing costs, so making a larger down payment may be worth considering.
20. Property Appraisal
An appraiser performs a property appraisal during the closing process to ensure that the property is actually worth the purchase price. An appraisal determines the property’s value based on several characteristics, including location and the property’s features compared to recent property sales in the same area.
A professional appraisal comes out to look at the house and examine its features. From there, they will research similar properties that have sold within the past three months and decide of the property value based on a comparison of those features.
21. Property Inspection
A property inspection is performed during the closing process to ensure there are no hidden issues with the property. A professional inspector will come out and inspect the house — inside and out, top to bottom. They will inspect the property’s physical structure and its systems, including the HVAC system, plumbing system, electrical system, and heating system.
Property inspections are usually required to secure a loan and are considered a “contingency” during closing. If anything comes to light during the inspection process, the buyer and the seller have to agree to terms — or the buyer can walk away.
22. Refinance
Refinancing usually involves taking out a new loan with better terms to replace the existing loan. Refinancing is a popular choice when interest rates are low as property owners can secure more favorable rates. Or perhaps the property owner improved their credit score and other qualifications to receive a better interest rate than the initial loan offer.
Additionally, refinancing lowers monthly loan payments once a property owner has paid a substantial amount of their loan. Under the right circumstances, refinancing can help you save money on the repayment of your loan
23. Title
A title is a legal document that proves property ownership. When purchasing a property, it’s important to conduct a title search to ensure that the seller is qualified to sell the property and that there are no issues with the property regarding liens, easements, encumbrances, etc.
A professional title search company is often used to gather complete and accurate information about the property. If the title company misses a potential issue with the title, you can also purchase title insurance to cover the costs.
24. Underwriting
When you apply for a loan, the lender doesn’t just take your word for it because that would be way too risky for them. Instead, they have to verify that the information from your application is accurate and true during something called underwriting.
Your income and employment are verified during the underwriting process. Lenders want to make sure that you have enough money and stability to cover your loan payments. Your credit report is also pulled during the underwriting process to ensure that you’re qualified for the loan and don’t have a history of financial red flags like missed payments, defaults, bankruptcies, etc.
25. Walkthrough
The walk-through is one of the last steps in the buying process. This step usually happens right before closing and involves the buyer and the buyer’s agent walking through the property to ensure it’s ready to close. The seller should have moved out and removed all the items that were not included in the property.
During the walk-through, it’s important to make sure that nothing was damaged or taken during the move-out process. This is especially true if you have negotiated the retention of certain items with the seller, for instance, the washer/dryer, the refrigerator, a hot tub, etc.
26. Prepayment Penalty
A prepayment penalty is a fee that’s charged to a borrower from a lender if they pay off the loan before the end of the term. Lenders want to make as much money as possible from interest, which means that they want you to take as long as possible to pay back the loan so that they can collect interest.
However, not all lenders charge prepayment penalties, so always check about this policy when you’re shopping around with different lenders. Vaster does not charge any prepayment penalties. This way, you’re able to pay off your loan as soon as you’d like without having to worry about paying any extra fees for doing so.
27. Interest Reserve
An interest reserve is designed to provide the borrower with the funds necessary to pay the accrued interest on a loan. Interest reserves are commonly used for construction loans that periodically disperse funds throughout the duration of the project.
28. Single Purpose Entity/LLC/Corp
A single purpose entity is a limited liability corporation (LLC) or corporation that owns a property and holds the mortgage but has no other assets or liabilities. The purpose of establishing a single purpose entity when purchasing real estate is to protect the property from claims made by other creditors.
29. Liquidity
Liquidity refers to how easy it is to convert an asset into cash. In real estate, it refers to how quickly a property can be bought or sold for a fair price that reflects its current value based on the real estate market.
Generally speaking, real estate is considered an illiquid asset class since it can be difficult and time-consuming to sell. Note that liquidity varies based on the property itself, property class, and local real estate market.
30. Interest-Only
An interest-only loan is a loan that allows the borrower to only make payments on the accrued interest instead of having to make payments on both the principal and the accrued interest. This type of loan is considered non-conforming, and therefore, can be difficult to secure.
Vaster offers interest-only loans as a short-term financing solution. For example, say that you take out a bridge loan with a one-year term. For that one year, you would only have to make monthly payments on the interest, after which you would pay the remaining balance of the loan once you secure permanent financing or sell the property.
31. Balloon Payment
A balloon payment is a large payment that’s due at the end of a loan term. For example, if you have an interest-only loan and are only making monthly payments to cover the accrued interest, a balloon payment covering the remaining balance would be due at the end of the loan term.
32. Exit Strategy
An exit strategy refers to what real estate investors plan to do with a property or a loan, either in the short term or the long term. Real estate investors may plan to simply sell the property to pay off the loan all at once.
They may also plan to rent it out and slowly pay off the loan over time. The best exit strategy depends on your finances, the property in question, and the local real estate market.
Bridge Loan Glossary Wrap Up
Now that you’re an expert on bridge loans, it’s time to move forward and secure one yourself. If you want the best rates and terms, then you need to check out Vaster. Vaster is a premier bridge loan lender with responsive customer service, transparent terms, and competitive rates.
Reach out to our lending experts for more information.
Sources:
A homebuyer’s guide to a competitive housing market | HousingWire.com
The Housing Market Is Crazier Than It’s Been Since 2006 | WSJ
Tricera Capital to start “The Press” mixed-use project in West Palm | The Real Deal
What Is a Good Credit Score? | Experian
How to Invest in Real Estate: 5 Ways to Get Started | NerdWallet
The Only Home Inspection Checklist You'll Ever Need | Fortune Builders
A Primer on the Use of Interest Reserves | Federal Deposit Insurance Corporation
What is a balloon payment? When is one allowed? | Consumer Financial Protection Bureau.
Be the first to know.
Get exclusive access to our latest insights and upcoming events
