Bridge loans are a way to use your existing equity to get short-term financing to purchase new real estate, start a business, or invest further in an existing business. The purpose of a bridge loan is to provide the necessary funds to cover a short-term need. Once that need has been met, the borrower pays off the loan after another property has been sold or income has been generated from the business.
For example, a small-business owner in California may need a bridge loan to fulfill the requirements of a new contract by hiring new people or purchasing equipment. When payment for the contract is received, the bridge loan can be paid off.
Of course, like any financing option, bridge loans have pros and cons.
Pros of Bridge Loans
Bridge loans come with several advantages over other financing options. Relatively fast approval times allow investors and business owners to jump on real estate opportunities. Hard-money bridge loans are especially good for closing deals on investment properties because you don’t have to include a contingency clause in your purchase offer, which moves you and your cash offer to the top of the buyer list.
Additionally, bridge loan approval depends on equity, not credit history. As long as you have enough equity, you can often get a hard-money bridge loan even if you have bad credit and a traditional bank has denied your application.
Income is not an issue, either. A traditional loan depends on your debt-to-income ratio, but a bridge loan is based on equity. This makes it a good option for people with little or no income, such as seniors, certain self-employed individuals, retirees, and those who write off a lot of their income or haven’t filed taxes.
If you are planning to sell one property in order to buy another, a bridge loan allows you to list your existing property faster. Most banks won’t approve a loan against real estate that is for sale, but a bridge loan allows you to do this so you can sell your existing property and pay off the loan faster. You may even be able to cross collateralize the property that you are buying to get additional cash to close.
Cons of Bridge Loans
Although bridge loans have many advantages, they come with some risk and are not for every borrower. For example, bridge loans have higher interest rates than traditional loans. However, because the intent is to repay the loan quickly, if your existing property sells fast enough, the interest doesn’t add up significantly. Monthly payments, however, are usually paid interest only without any going into principal, which may soften the monthly cost.
Origination fees for these types of loans are typically higher than with traditional loans as well. The trade-off is the fast approval, which allows you to seize on opportunities when they arise.
Because the loan depends on equity, the value of your existing property matters, which means you might also have to pay for an appraisal. However, most traditional loans also require an appraisal, which can add to the overall time to close. Fortunately, not all bridge loans require an appraisal, and when they do, they often happen much quicker.
Taking out a bridge loan sometimes means that you own multiple properties while you’re waiting for one to sell. Depending on how long it takes to sell your property, you might have two mortgages to pay at the same time. Factor this into your risk assessment when deciding whether a bridge loan is right for you.
Find the Right Bridge Loan Provider in California
For California real estate investors, bridge loans are great if you have equity and are confident that your existing property will sell within a few months. For entrepreneurs, bridge loans can be exactly the infusion you need to take your business to the next level. If you have decided that a bridge loan might be the right fit, work with a local lender to build a long-term relationship for your future financing needs. To get a bridge loan in California, start with our short-form application today.