Bridge loans are short-term loans that many experienced real estate investors take advantage of, but they can also be used by first-time home buyers as well as new commercial real estate investors. Because these are short-term loans, they can provide real estate buyers with a source of capital when other funds are not readily available.
How Bridge Loans Work
This type of financing is not intended to be a permanent loan. Some bridge loans require the permanent financing to already be identified before closing can occur. Most, however, have a term that may range from about six months to 18 months, although this time frame can vary. Many permanent commercial and residential real estate loans require the borrower to pay a certain amount of money as a down payment, and closing costs are also due. For buyers who do not have these funds readily available, bridge loans can cover the initial cost of purchase. The buyers will then have more time to save money for the down payment and closing costs for the permanent loan, or the buyer may sell assets or obtain funds from other sources during this period of time.
For Qualification Purposes
It is also important to understand that bridge loans may also be used to assist a buyer with immediate financing when the buyer does not immediately qualify for permanent financing. For example, a buyer may not currently have the debt-to-income ratio required to qualify for a permanent loan. With a bridge loan, the buyer can purchase the property now, and he or she will have several months or longer to restructure personal finances to qualify for the permanent loan.
An Exit Strategy
As mentioned, some bridge loans will require the borrower to have an exit strategy at the time of purchase. However, even when this requirement is not in place, it is imperative that the borrower has a sound strategy for obtaining permanent financing. Bridge loans generally cannot be renewed or extended, and they typically must be taken out with another loan. In order to avoid defaulting on the bridge loan or having to obtain a high interest rate, hard money loan, the borrower should take time to analyze the permanent financing requirements and to develop a plan for qualifying for that program. It may be wise for the borrower to work with a permanent loan representative at the time of purchase to determine what specific areas of his or her finances need to be altered so that a permanent loan can be obtained.
Bridge loans themselves may have higher interest rates than permanent loans, and they do have closing costs associated with them. Despite these factors, however, they can provide residential and commercial real estate buyers with a great way to purchase a property when funds are not immediately available or they do not currently qualify for permanent financing. If you believe that a bridge loan may be suitable for your needs, it is imperative that you understand the terms and conditions of these loans before making the decision to apply.