What is a Bridge Loan and When Should I Use One?

Written by Posted On Friday, 26 February 2021 09:20

Bridge loans are short-term loans that are utilized until longer-term financing can be secured. Bridge loans “bridge the gap” between one type of financing and another.

A bridge loan is used when a property owner needs to purchase a new property but currently doesn’t have a sufficient down payment to secure financing for the new property. The property owner is able to take out a bridge loan against the equity in their current property in order to raise the funds for the new purchase. After new home purchase is completed the previous property is sold so that the bridge loan can be paid off.

Residential bridge loan lenders tend to focus on the property value as well as the amount of equity the property owner has in the property and can overlook issues such as poor credit scores and current lack of income. Because the property owner will be attempting to purchase a new property with traditional financing with lower rates, they need to have good credit and enough income to satisfy the bank’s lending criteria. Short-term bridge loan rates will be higher than conventional loans.

RELATED: What is a bridge loan? How does a bridge loan work?

Up to 70% loan to value (LTV) financing is generally allowed by bridge loan lenders. In situations where the property being used as collateral is not free and clear, the remaining mortgage and lien balances are used to calculate the combined loan to value (CLTV) ratio. Bridge loan rates will be higher than conventional loan rates due to the increased risks that come with a bridge loan. Bridge financing usually has a term of 12 months or less.

Traditional lenders such as banks do not always offer bridge loans. Experienced hard money lenders are very familiar with providing bridge loans and are able to provide funding much quicker than traditional lenders. Most hard money lenders are able to fund in 5-10 days while banks can take over 45 days.

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Jeff Hensel

North Coast Financial, Inc. is a California hard money lender with over 37 years of experience specializing in various types of hard money loans including probate and estate loans, investment and rental property loans, bridge loans, fix and flip/rehab loans, purchase loans, cash out and refinance loans and other hard money loans with California real estate as collateral.

https://www.northcoastfinancialinc.com/

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