Bridge loans are defined different depending the context. For some, a bridge loan is a short-term loan that helps the borrower meet their short-term liquidity requirements while they try to secure permanent financing. For others, it can bridge a time period gap while improvements are made to the property or its finance ability. Banks and private money lenders, such as Altus Capital Group, offer bridge loans to their borrowers.
What is a Bridge Loan?
Bridge loans, also known as swing loans, may be used by homeowners who want to buy a new house before selling their existing property and need to make a down payment on their new home. They can also be used by businesses that need to cover operating expenses while trying to secure long-term funding. However, the most common use of bridge loans is by real estate investors who need to close quickly and with confidence with financing that can be in place through the improvement or repositioning stages of a real estate project. Bridge loans usually have higher interest rates than traditional long-term loans.
Most bridge loans are secured by the underlying real estate. The loan to purchase price (or in some cases valuation) varies by the type of real estate being offered as the collateral. For a single family residence, a bridge loan may provide all the way to 80% of the capital needed for purchase, while only providing less than 50% of the funds needed on a land purchase.
Bridge loans are typically offered with 1 to 2 year terms, but may be shorter in term and in some cases can be as long as 3 or 4 years.
Some bridge lenders will base the The loan amount depends on the borrower’s credit history income. In those cases the bridge loan qualification criteria may include an excellent credit score and a low debt-to-income ratio. Other bridge lenders, including most private lenders, are more focused on the collateral offered for the loan and the ensuring a safe loan to value ratio based on the collateral and the likelihood of default.
When to Use a Bridge Loan
- Want to buy a new home, but the seller won’t accept your offer until you sell your current home.
- Want to close on a new house before selling your current property.
- Cannot afford a down payment on your new home without first selling your existing property.
- Fix and Flip properties
- Distressed real estate purchases
- When a short escrow period is required
- When not wanting to deal with the intrusive underwriting required by traditional lenders.
Private Money bridge loan interest rates vary depending on the asset quality, the loan to value, and to a lesser extent, the borrower’s creditworthiness. Additionally, interest rates will adjust with economic activity and interest costs in the broader economy. Real estate bridge loans current have interest rates ranging from 9 – 12%. Interest rates for business bridge loans usually range from 15-24%. Other costs include closing costs and administrative and legal expenses. Bridge loan closing costs, loan fees, and processing fees usually range from 2.5-4% of the total loan amount.
These costs usually include the following:
- Escrow fee
- Appraisal fee
- Loan origination fee
- Title policy costs
- Notary fee
- Document Preparation Fee
Bridge Loan Benefits:
- Borrowers get immediate access to cash
- The terms of a bridge loan can be tailored to the needs of the borrower
- Faster approval and closing
- Bridge loans can help business owners ensure smooth sailing while they try to secure long-term financing
- Creative structuring to maximize borrower value
Altus Capital Group is a leading real estate lending company serving Rohnert Park. They are committed to expanding access to finance for real estate investors and offer tailored loans to borrower’s needs. To make an appointment, call (707) 932-5887.