What is a Bridge Loan?
A bridge loan is a short-term loan to provide financing during a transitionary period, such as when a builder or flipper has recently completed a project and is awaiting the property to sell, or when a new rental property is in need of seasoning before being eligible for long-term financing.
Bridge loans are among the most common asset-based loans offered by private lenders. Offering short-term financing based on the current value of a property, bridge loans provide the funding needed until more permanent financing is secured or until existing obligations are removed (i.e., a property is sold).
Receiving the bridge loans allows the borrower to cover upcoming expenses in between paying off past projects and wrapping up their loose ends.
Bridge loans offer shorter-term financing than conventional loans and provide immediate funds to meet current obligations. A bridge loan can vary in costs and payment terms, depending on the lender. Some lenders require regular monthly payments; others may include upfront and/or end-term or lump sum payments to the loan structure.
In general, bridge loans have fewer guidelines and offer a faster approval process than traditional loans, providing maximum flexibility for short-term real estate investing, and making them ideal for investors requiring fast and convenient access to funds.
With the property assets and a clear plan to repay the loan, real estate investors are able to accept the higher interest rates associated with bridge financing. While typically issued with a higher interest rate than longer-term debt, lenders can structure a bridge loan to be non-recourse.
Under these terms, the property itself is the guarantee attached to the note. The borrower’s exposure is limited to property and holds no personal liability, even if the value of the property does not cover the remaining loan balance.
When Do Bridge Loans Make Sense?
- Allowing time to sell a renovated home for maximum value and ready for your next project
- To quickly close on a foreclosed, bank-owned, or distressed property for renovation before another flipper takes the property off the market
- Allowing time to acquire permits and update the investment property to improve your ROI
- Enable the completion of rehab and renovations or stabilizing rental history prior to securing longer-term financing
What to Think about When Considering Bridge Loans
Pros of Using Bridge Loans in Real Estate
The money you get from a bridge loan can help you have more spending options when looking at new homes. It means you have more liquid, or cash, for those sellers. They in turn will be more likely to want to work with you instead of waiting for the promise of money in the future.
Homeowners also have less stress when selling their homes while buying a new one. From a business standpoint, companies have freedom with bridge loans to take on ambitious projects.
Cons: What Could Possibly Go Wrong?
Bridge loans come with higher interest rates. This happens for a couple of reasons. Because these loans cover shorter-term periods, lenders charge higher interest to keep the value of their investment over time.
Since gap financing covers cash shortages, bridge loans carry an extra risk for lenders. They expect to immediately receive dividends from their borrower’s future assets. But sometimes, unforeseen circumstances can affect sales.
If someone takes out a bridge loan because they owe a lot of money, but can’t pay the bridge loan as promised, they bury themselves into even more debt and can create further financial strain.
Also, borrowers have to pay back using their own dividends. With the extra interest, overall profits are reduced and can result in an overall loss.
Less Cash Doesn’t Take Away Your Options
If you’re an experienced real estate investor and are ready to buy—but don’t want to wait to sell—bridge financing provides ready opportunities for assistance. LYNK Capital has a suite of customizable financing products to suit your individual investment objectives.