There are times when real estate investors and developers need a dependable source of cash to carry them over troubled financial waters. When they do, they often consider bridge loans. What’s unique about a bridge loan is that it’s meant to be a short-term loan that tides the borrower over until he or she receives the proceeds of a long-term loan. If you find yourself in this category, be sure you understand what you’re getting into and what you can get out of a bridge loan.
Length of Time
In most cases, the overall length of your bridge loan won’t exceed two years. Before accepting the terms of such a loan, make sure you’ll have access to a longer term loan or that you’ll be able to successfully liquidate the property before the end of two years.
Amortization and Interest Terms
Something else that’s common with bridge loans is they’re interest-only financing options, which means there’s either very little amortization or none at all. You can expect to have to pay your principle in full once the loan matures. What’s more is that zero-coupon notes and negative amortization may be options for your bridge loan terms.
In regards to the actual interest you can expect to pay for a short-term mortgage, you can count on higher rates than those common to standard real estate loans. The reason for this is lenders are often putting themselves at financial risk by offering to underwrite a bridge loan. Specific risks include not having unfettered access to information, the risk of a borrower defaulting and taking a liquidity risk.
Even though you’re likely to frown at the interest rates involved with bridge loans, you’re likely to smile when you realize that your funds can be made available in as little as 30 days. This quick turnaround time is attributed to the fact that lenders aren’t required to fulfill as many due diligence requirements, and loan structuring is more flexible as well.
Don’t have the best of credit? Not to worry. A bridge loan is more concerned with the overall value of the collateral rather than your credit score as a borrower.
If you ever find yourself needing to take advantage of a real estate offer that comes with a quickly ticking clock or wanting to keep a property out of foreclosure, consider applying for a bridge loan. With funding out of the way, you’ll be able to focus on other aspects of your real estate deal.