Bridge loans are short-term loans that can fill opportunity gaps left behind by traditional loans. While, traditional loans can take months to finalize, a bridge loan generally can close within 2 weeks.
Apart from the speed in execution, a bridge loan can also be employed when you have challenges qualifying with a bank; be it credit score driven, proof of income and/or sources of funds.
In a recent investment purchase of a waterfront single family home, priced undervalue at $10MM – which is considered a trophy asset, we had a guarantor with some credit hardships. These credit issues, however, were easily explained and accepted by us, but because their score was below most bank’s thresholds, they couldn’t qualify for a traditional loan. Making it more difficult was the loan size, known in industry lingo as a “super jumbo loan” of $6MM. However, they did have sufficient assets to complete a 40% down, cover closing costs, and also prove post-closing liquidity of over 12 months of interest payments. These factors positively improved our risk and earned an approval. We also executed within time, closing a deal for a buyer that was competing with cash rich transplants from New York and other states that are looking at South Florida as a new tax and health haven. Being able to close under 30 days (21 days) gave their offer a competitive advantage and secured a valuable investment in a current market dominated by luxury sales. The investor plans to hold and rent while creating a marketing plan with a local real estate broker to eventually sell in a post-pandemic (COVID-19) market, a market that is experiencing diminishing inventory and a torrid pace. The bridge loan was able to close the gap in approval and provide the buyer strength in order to execute quickly on a real estate investment opportunity.
Flexible and adaptable mortgages
Unlike traditional loans, bridge loans provide flexibility and can be personalized to fit your real estate investment needs.
Bridge loan rates are generally higher than rates on traditional loans but lower than other lending options such as hard money loans.
Variable and fixed rate options
For shorter investment horizons, coupled with stable interest rates, a variable option is the better option. However, if you have a longer hold with a higher forecast for interest rates, a fixed rate option is a safer bet.
Alignment with your exit strategy
Being clear on how you plan to pay back the bridge loan is critical to getting approved. Assuming a solid exit strategy, you will likely find that bridge loan lenders are accommodating. The most common exit strategies for bridge loans include:
Refinance with a conventional mortgage
Sale of the asset
Income from other ventures
Payoff your loan at any time
Payoff or pay down your loan at any time with no pre-payment penalty fees.
Interest only payments
Bridge loan payments that are interest-only often have smaller monthly payments with the principal amount being paid at maturity.
Asset based lending
Bridge lenders interests are secured by the collateral instead of by the borrower’s personal income and credit score
Good options for foreign investors
Bridge loans are ideal for foreign investors who do not have a way to verify their income and/or do not have sufficient credit history to apply at a U.S. bank
Additionally, you can find bridge loans with terms of 1- 3 years, providing for a wide range of financing to suit various scenarios. Before jumping into a loan, consider asking if loan extensions are an option. Extensions can provide the flexibility needed when more time is required to pay off the loan.
Vaster Capital is a leading bridge lender specializing in real estate investment properties. We offer custom structured loans for residential, commercial, and land assets. Get a loan approval in less than 24 hours and close in as little as 7 business days.