Real estate lending can be confusing, no thanks to endless terms and technicalities that can be hard to decipher. One specific loan that tends to garner a lot of confusion is the bridge loan. To make the best financial decision regarding your real estate purchase, you need all the information. So let’s talk about interim financing for real estate called bridge loans.
A bridge loan for real estate essentially allows buyers to bridge the gap between purchasing a property – like new office space – and securing permanent financing. This is because securing permanent financing can be a lengthy and detailed process that may cause you to lose out on the property, especially if you're relying on maintaining a certain level of cash flow to sustain yourself.
So instead of waiting around and risking the property, bridge loans (and other short-term loans, for that matter) can be used to get you your financing quickly and easily.
How Does a Bridge Loan Work in Real Estate?
Bridge loans are a unique temporary lending solution that provides you with the money you need to make a quick real estate purchase. Since these loans are short-term in nature, they typically come with one-year repayment terms. Depending on your qualifications, they also come with interest rates that usually fall between 6% and 10%.
A year later, once you have secured permanent financing, you use your new loan to pay off your existing bridge loan for the original value plus the interest cost.
What Is a Commercial Bridge Loan?
Sometimes referred to as a business purpose loan, a commercial bridge loan is a bridge loan specifically designed for investment properties. Commercial bridge loans can be used to finance assets like office space, multifamily housing, retail space, or vacant land zoned for commercial use.
An investment property can also be a house, condo, townhome, or vacant residential land, as long as the property is non-owner occupied. This means that the property cannot be the primary residence of the borrower. Additionally, commercial bridge loans can also be used to finance a single-family home, condo, and more.
Who Should Get a Bridge Loan for Real Estate?
In reality, a bridge loan is ideal for anyone looking to make a quick real estate purchase or stay competitive in a fast-moving market and is beneficial for both buyers and sellers. However, bridge loans may be an especially appealing financing option for foreign investors. This is because bridge loans don’t come with strict qualification or documentation requirements.
As a result, foreign investors without substantial tax or income histories in the United States are well-served by this type of loan. Bridge loans are a solid option for those with lower credit scores since they don’t meet all the typical conventional loan requirements.
Pros and Cons of Bridge Loans
Like anything, there are pros and cons to bridge loans that you should consider before making your final decision. Here’s a quick look into why you should or shouldn’t go with a bridge loan to finance your real estate purchase:
Bridge loans offer quick and easy stopgap financing so that you can make a competitive offer on a property and get to the closing table promptly. Gap financing can help expedite transactions in many situations. A bridge loan can help you execute a real estate transaction quickly so you can have more time to qualify for longer-term financing.
Bridge loans offer flexible terms that you can tailor to meet your needs. For instance, you can choose between a fixed rate or a variable rate. You can also choose your repayment time frame and go up to three years if needed (extensions are also available). Hard money bridge loans are another option for borrowers with collateral property.
Bridge loans may or may not come with any prepayment penalties. At Vaster, we do not charge any prepayment penalties.
Bridge loans offer more accessible short-term financing to those that may not qualify for a traditional loan because of weak credit history or inability to verify some or all of their income. This is a huge advantage for someone who wants to buy new property quickly.
The only real con of a bridge loan relates to interest rates, closing costs, and fees. Bridge loans come with slightly higher interest rates than conventional loans but are substantially lower than those seen with other loans like hard money loans. In many cases, paying higher rates is worth it if you are experiencing a liquidity gap or have contractual obligations that require a fast closing.
4 Alternatives to Bridge Loans for Real Estate
Based on these pros and cons, a bridge loan isn’t necessarily right for everyone. The good news is that there are plenty of lending alternatives out there to consider when purchasing or investing in real estate.
For instance, you could get a conventional mortgage loan, a hard money loan, a private money loan, a home equity loan, or simply use cash.
Let’s dive deeper into each of these alternatives so that you can make a solid financial decision:
1. Conventional Mortgage Loan
The most common type of loan for real estate is a conventional mortgage loan. This is the type of loan that big banks typically give out. Conventional mortgage loans can come with fixed or variable interest rates and typically have terms of either 15 or 30 years.
And while these loans may offer competitive interest rates, they are harder to qualify for. Big banks often require you to have a high credit score, employment history, and solid cash reserves to be eligible for a conventional mortgage loan.
2. Hard Money Loan
Another type of loan for real estate is a hard money loan. A hard money loan is completely focused on the asset rather than the borrower’s creditworthiness. As a result, it’s often easier to qualify for hard money loans, and they will typically have higher interest rates.
This non-conforming loan type is backed through a tangible asset belonging to the borrower. If you are unable to pay back the loan, your lender can just take possession of the asset and sell it to get their money back. This type of loan is considered riskier than other types and comes with higher interest rates. With that said, it is easy to qualify for and also comes with a quick closing timeline.
3. Home Equity Loan
On the other hand, if you already have some real estate holdings but are looking to purchase or invest in other properties, you could use a home equity loan to finance your purchase. A home equity loan allows you to access the equity that you’ve built up in your home — so long as you’ve already reached 20% equity.
From there, most lenders allow you to borrow up to 80% of your home’s equity. Home equity loans often come with lower interest rates since you’re using your own equity. However, you must be comfortable with possibly risking your home if you can’t pay it back.
Finally, and perhaps obviously, you can use cash to finance your real estate purchase. This is a good option as it doesn’t involve applications, processing, interest rates, etc. However, cash isn’t an option for everyone, which is where loans come into play.
Additionally, it’s typically better to utilize debt rather than cash payments for investment purposes. Using debt that costs less than the rate of return on investment can multiply the returns yielded per dollar spent.
How To Get a Bridge Loan in Five Steps
If you have decided that a bridge loan is the best option for you, here’s what you need to do to secure one and purchase your dream property:
1. Finding a Lender
The first thing you need to do is find a lender. Not all lenders offer bridge loan products. Instead, you will need to search for lenders that offer this specific product. The best place to conduct your search is the internet. Once you have a list of potential lenders, you need to do your due diligence.
Make sure that you find a lender that is trustworthy and responsive. Also, make sure that your lender is an accomplished professional in the field with local experience or lends in your state who can get you from application to closing quickly.
2. Applying for the Loan
Speaking of application, that’s the next step in the process. Often, it makes sense to reach out to several different lenders for interest rate quotes. From there, you can choose your lender based on who is offering the best interest rate.
Once you have chosen your lender, it’s time for the actual application. You will likely need to provide documentation surrounding your finances, specifically bank statements, to verify that you meet liquidity requirements. Even if you aren’t liquid, you could still get approved through an interest reserve holdback. The lender will also run your credit report to ensure that you don’t have a history of defaults or bankruptcy.
3. Loan Underwriting
In this step, your lender’s underwriters will verify everything on your application and calculate the valuation of the subject property using both comparable sales and income valuation methods. Once the information has been verified and the loan has been approved, the lender will issue the term sheet to the borrower.
If the asset is land, the lender will also look at the feasibility of the project (both zoning and financially). Additionally, during the underwriting process, the lender looks at the exit strategy to ensure it makes sense.
4. Loan Processing
After the term sheet is executed by the borrower, the lender will begin processing the loan and will send out a document checklist for the borrower to review and complete.
Once all documents have been provided, the borrower is now cleared to close. Closings can be done in person or remotely. The borrower can expect the funds within a few business days.
In some cases, you can get your funds within a few business days so that you can move forward with your real estate purchase.
Final Thoughts on Bridge Loans
When it comes to bridge loan lenders, there’s none better than Vaster. Vaster specializes in providing quick and easy bridge loan financing to help you remain competitive in a fast-paced real estate market.
Additionally, Vaster is committed to total transparency and top-notch customer service to guide you from application to closing and eventually repayment.
For more information about bridge loans or our other loan products, reach out to our lending experts today for personalized assistance and solutions to help make your real estate dreams a reality.