If you have ever looked at the types of loans offered by real estate lenders, you may have seen the term “bridge loan.” Most people have very little idea of what this means. Even those who have some understanding of bridge loans can find themselves confused as they delve deeper. Understanding bridge loan lenders and how they operate can help you make better decisions for your borrowing needs.
What Is a Bridge Loan?
A bridge loan is a type of loan secured by real estate that is intended to move very quickly and only be used in the short term. In other words, this type of loan is used to bridge the gap between your current financing state and your future financing.
For example, you may use a bridge loan to cover the down payment on a property while you sell your current home. In this case, it acts as a bridge between getting a new mortgage and selling your current home, preventing the need to line the two events up.
Sometimes people use bridge loans as short-term financing while they arrange longer-term financing. This is particularly common for commercial real estate deals in which moving quickly on an opportunity is important.
Bridge Loan Property Types
Bridge loans are typically offered by private money lenders who can typically be very flexible about the type of property you use the loan for. These are a few examples of the types of properties you can buy:
- Single-family home
- Multi-family property (unit or building)
- Commercial space
- Industrial facility
- Undeveloped land
- Agricultural land
These properties can be either investment purchases or owner-occupied. Expect a residential property to receive a higher loan-to-value ratio than other property types.
Bridge Loan Characteristics
Typically, bridge loans carry high-interest rates. They are only intended for the short term, so the lender needs to make its money relatively quickly. There are often fees for bridge loans in the range of two to three percent of the loan amount.
When You Should Use a Bridge Loan
A bridge loan can be helpful when you don’t have the funds to make a down payment but expect to have them in the near future. The most common example of this is when you are moving home and you have not sold your current home yet. Rather than needing a contingency on your offer, you can take out a bridge loan. This may help you secure a better price on the new home because contingency offers are considered less valuable.
Another example of when you would use a bridge loan is if you have an investment opportunity that is very valuable. If you expect someone else to jump on the property quickly, you could use a bridge loan to help you secure financing while you get down payment money from another source.
Finding the Right Lender
As with all loans, bridge loans are most valuable when you have the right lending partner. If you are in the LA area, explore some of the hard money lenders Los Angeles has to offer. Check out your options before moving ahead. With the right lender, you can seize a lot of opportunities.