Commercial Bridge Loans
How Does A Commercial Bridge Loan Work?
A commercial bridge loan is a short-term financing option commonly used in real estate to address immediate funding needs. It serves as a temporary solution until a more permanent or long-term financing option can be secured.
Here are some key points to understand about commercial bridge loans
Short-term financing commercial bridge loans typically have a short repayment term, ranging from a few months to a couple of years. They are designed to provide quick access to capital for time-sensitive opportunities, such as purchasing a new property, refinancing existing debt, or covering renovation costs.
Bridging the gap as the name suggests, bridge loans are meant to bridge the gap between immediate financial needs and a more permanent financing solution. For example, if you are in the process of selling a property and need funds to purchase a new one, but the sale hasn’t closed yet, a bridge loan can provide the necessary capital to proceed with the purchase.
Common reasons to seek out a commercial bridge loan include
Collateral-based: Commercial bridge loans are typically secured by collateral, such as the property being purchased or other valuable assets. Lenders assess the value of the collateral to determine the loan amount and terms. This collateral helps mitigate the risk for the lender and increases the chances of approval.
Higher interest rates: Due to the short-term nature and perceived higher risk associated with bridge loans, interest rates are usually higher compared to traditional long-term financing options. However, the convenience and speed of obtaining the loan can outweigh the higher cost for borrowers who need immediate funding.
In general, two main options are available for those seeking a bridge loan
Faster approval process: Bridge loans often have a quicker approval process compared to other types of financing. This is because they are primarily based on the collateral’s value rather than extensive financial documentation or credit history. This allows borrowers to take advantage of time-sensitive opportunities without delays.
Note that applying for a bridge loan works similarly to applying for a conventional mortgage. We will look at numerous factors when considering applications including your credit score, credit history and debt-to-income ratio (DTI). What’s more, the majority of institutions that issue bridge loans will allow applications to borrow a maximum of up to 80% of their loan-to-value ratio (LTV). In other words, you’ll typically need a minimum of 20% equity in your current home in order to qualify for a bridge loan package, as well as to meet additional financial qualifications outlined here.
Pros And Cons Of Bridge Loans
As with all forms of lending and financing, there are advantages and disadvantages associated with taking out a bridge loan. Let’s consider the upsides and downsides inherent to this form of borrowing:
Similarly, bridge loans tend to
- Run for 6-month or year-long terms
- Be secured using the borrower’s current home as a form of collateral
- Only be issued by lenders with whom you agree to finance your new mortgage as well
- Vary in amounts of interest charged, with charges typically hovering slightly above the prime rate
The Baldwin Mortgage Group Loan
Benefits of a Bridge Loan
- A bridge loan offers you the opportunity to buy a new house before you’ve sold your current home.
- You can make an offer on a new home without having to implement a sale contingency.
- It also provides additional funds in the event of a sudden or time-sensitive transition.
- It presents a helpful short-term solution for financing your way through periods of uncertainty.
- There is often the prospect of no monthly payments for the first few months.
- There’s potential for interest-only payments, or payments that are deferred until you sell.
Drawbacks of a Bridge Loan
- Bridge loans come with higher interest rates and APR.
- Most lenders require a homeowner to have at least 20% home equity built up before they’ll extend a bridge loan offer.
- Many financial institutions will only extend a bridge loan if you also use them to obtain your new mortgage.
- You may own two houses for a time – and managing two mortgages at once can be stressful
. - Trouble selling your property can lead to future issues, or – in a worst-case scenario – even foreclosure.
