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Need to quickly secure funds? A bridge loan can get you to the closing table fast. Discover the power of bridge loans.
Time is of the essence when purchasing or refinancing residential or commercial real estate. Bridge loans are designed to finance these time-sensitive transactions.
This guide will introduce you to bridge loans, how they work, and their pros and cons.
Bridge loans are short-term financial solutions primarily designed to help individuals or businesses overcome temporary funding shortfalls when purchasing or refinancing real estate. They serve as “bridges” that connect two separate financial points, providing immediate cash flow until the borrower executes upon the exit strategy, e.g., securing long-term financing.
In the context of real estate, a bridge loan, sometimes referred to as hard money, private lending, or collateral-based lending, is a fast, temporary loan designed for urgent mortgage needs. This type of loan serves as a “bridge” to fill gaps in financing, especially when a borrower doesn’t qualify for a regular mortgage or when they need funds faster than traditional lenders can provide.
Bridge loans operate on a straightforward principle. A borrower secures this type of loan when they need immediate cash to cover a gap in financing. This often occurs when the borrower is waiting for longer-term financing to come through or needs to meet a pressing financial obligation.
For example, if you find your dream house but haven’t sold your existing home, a bridge loan can provide the funds needed for the down payment. Once your old house is sold, you repay the bridge loan. (We discuss other common scenarios for bridge loans further below.)
Given the short-term nature of this type of loan (one to two years), it is important to understand how a bridge loan works:
Just like traditional loans, bridge loans can also be used for buying new properties or refinancing the current mortgage.
But because they’re riskier for lenders, bridge loans have shorter payback times – typically one to two years – and relatively high interest rates.
A standard feature of bridge loans is that only the interest is paid monthly, with the rest of the loan paid back when the loan ends.
This setup allows borrowers to sort out their financial situation in readiness for the larger payment at the end of the loan.
But paying back the main part of the loan in just one to two years can be tough, so borrowers often need to secure another mortgage with better terms and a longer repayment period.
Since bridge loans are temporary, it’s important for borrowers to have an exit plan in place to secure permanent financing before the bridge loan ends.
Essentially, a bridge loan buys a borrower time to solve issues that prevented them from getting a traditional mortgage and gives them a chance to secure a longer-term loan that matches their cash flow.
The primary factor determining bridge loan qualifications is the value of the property being used as collateral. To establish this value, an appraisal is generally conducted by a professional appraiser.
The higher the property’s assessed value, the larger the potential loan amount, enabling borrowers to finance their immediate needs efficiently.
Unlike traditional loans, bridge loans shift the focus away from the borrower’s personal financial situation. Rather than examining the borrower’s credit score, credit history, debt-to-income ratio, income, or employment status, the bridge loan lender concentrates solely on the collateral value.
The fundamental principle behind bridge loan requirements is their collateral-based nature. This highlights the fact that the property is paramount when qualifying for a bridge loan.
Thus, borrowers who may struggle to meet traditional loan qualifications due to their personal financial circumstances often find bridge loans an attractive and feasible option. This unique feature of bridge loans makes them a flexible solution in many scenarios where immediate funding is necessary.
The process for obtaining bridge financing typically includes:
Application: Like any other loan, you’ll first need to apply with a lender. However, for a bridge loan, the lender will look primarily (if not solely) at the value of the property. They will not review your credit history, credit card debt, debt-to-income ratio, or the details of your personal financial situation.
Approval and Terms: If approved, the lender will set the terms of the loan, including interest rate and repayment schedule. Bridge loans typically have higher interest rates than conventional loans due to their short-term, high-risk nature.
Funds Transfer: Once the closing documents are signed, funds are transferred. You can then use the money to cover your immediate financial needs.
Repayment: After securing long-term financing or fulfilling the existing obligation, you repay the bridge loan.
Given the higher interest rates associated with bridge loans, you may wonder, “Is a bridge loan a good idea?” The short answer is, “It may be your only choice,” especially if you don’t qualify for a regular mortgage or if you need funds faster than traditional lenders can provide.
Bridge loans serve an important purpose, as they cater to 2 main types of special circumstances:
Inability to meet traditional underwriting guidelines. Traditional lenders stick to a set of guidelines established by the Dodd-Frank Wall Street Reform and Consumer Protection Act to assess whether a borrower meets the “ability to repay” test. However, not everyone can meet these strict rules.
Time crunch. It can also take a long time to get a loan approved through traditional methods. If a borrower is under a tight deadline and they don’t have mortgage approval yet, a bridge loan can be a lifeline.
In short, bridge loans can be a good idea under the right circumstances. Bridge loans offer a quicker solution for borrowers who can’t get a traditional mortgage. And, they’re fast, convenient, and designed for people who need a loan quickly.
When considering a mortgage bridge loan, understanding the different bridge loan options available can help you select the best one for your circumstances.
There are several types of bridge loans, each designed to accommodate specific financial needs and situations. These include:
Bridge loans for home purchase
Single-family home bridge loan
Commercial mortgage bridge loans
Construction bridge loans
Hard money bridge loan
Bridge loans for bad credit
Bridge loans for investment property
A bridge loan for home purchase is a popular choice for homebuyers who have made a contingent offer (i.e., they need to sell their current home before buying the new house).
These loans provide the funds required for the new purchase, essentially bridging the gap between the sale of the old home and the purchase of the new one.
Bridge loans for residential real estate are designed to facilitate a smooth transition, avoiding the need for temporary housing or inconvenient move dates.
Finally, a bridge loan to buy a house gives homeowners the flexibility to secure a new property, even while their current home is still on the market.
A single-family home bridge loan is a variant of the typical bridge loan, focused specifically on single-family residences.
This type of loan is ideal for individuals or families that need to move quickly and can’t wait for the sale of their existing single-family home.
With a single-family home bridge loan, borrowers can secure their next residence without the stress of synchronizing sale and purchase timelines.
The funds from the loan can be used to secure the new property, with the loan repaid when the original home sells.
Commercial mortgage bridge loans provide short-term financing for commercial real estate transactions.
This could include buying a new property, renovating existing premises, or providing a cash flow cushion while more permanent financing is arranged.
They are particularly useful in competitive commercial real estate markets where being able to move quickly can make a significant difference.
Commercial bridge loans can be paid back when the property is sold or when longer-term financing is secured.
Construction bridge loans are a specific type of bridge loan used for both residential and commercial construction projects.
They provide short-term funding for projects in their building phase and are typically paid off with longer-term financing once the construction is completed.
For residential builds, this could be a traditional mortgage; for commercial projects, a commercial mortgage might be used.
This type of financing allows projects to move forward without delays due to funding issues.
Hard money bridge loans are a form of short-term lending provided by private lenders or individuals, rather than banks or traditional financial institutions.
Like other bridge loans, they use the property as collateral.
However, hard money bridge loans typically come with higher interest rates and shorter terms.
They’re often used by real estate investors who need quick access to financing, or by individuals who can’t qualify for other types of loans.
Bridge loans for bad credit offer an opportunity for individuals with less-than-perfect credit scores to secure short-term financing.
Given that these loans are collateral-based, focusing on the property value rather than the borrower’s credit score, they can be a viable solution for those who may not qualify for traditional loans.
However, borrowers should be aware that these types of bridge loans can come with higher interest rates and fees as a result of the increased risk to the lender.
A bridge loan for investment property is a short-term loan that real estate investors use to quickly purchase properties.
These loans are typically used to buy rental properties, fix-and-flip properties, or commercial properties.
They provide investors with the flexibility to act swiftly in competitive markets, securing desirable properties before long-term financing can be obtained.
Once the property is renovated or rented, investors typically refinance with a conventional mortgage or sell the property.
When buying, refinancing, or investing in a property, many potential borrowers confidently anticipate mortgage loan approval. However, challenges often emerge, and the loan is denied.
This is a familiar scenario to many. Attracted by the lower interest rates, borrowers often aim for traditional loans from large banks, only to discover they don’t meet the minimum mortgage requirements.
This typically results in wasted time and unmet expectations. Only when faced with this stressful situation do borrowers turn to bridge loans for a mortgage.
As a borrower, understanding your situation and the odds of securing a traditional mortgage can help prevent such challenges and make the bridge loan process much smoother.
In other words, it’s often more efficient and strategic to directly apply for a bridge loan, avoiding the potential pitfalls and delays associated with pursuing a traditional loan that may not suit your circumstances.
Here are the most common scenarios where bridge loans come in handy.
Income proof is crucial for securing a traditional mortgage loan as it helps lenders assess your ability to manage monthly payments and the stability of your income sources.
However, individuals like the self-employed, retirees, or unemployed may struggle with providing proper income documentation such as tax returns or pay stubs, often leading to denials from traditional lenders.
Here’s an example of how a bridge loan can save the day in this situation:
The borrower was under contract to purchase a vacation home for the family. He is a professional who used to be employed, but just a year ago, decided to become self-employed with his own practice. As his first option, he applied for a mortgage loan offered by a major U.S. bank. However, during the process, he ran into the following problems:
Like most big U.S. banks, the mortgage bank’s underwriting process was really slow;
The lender did not provide him with any straight answer regarding his application; and
Because of his self-employment, he could not show recent, consistent income.
With the clock ticking, the borrower decided to let go of his first mortgage application and opt for a bridge loan instead. He enjoyed a quick closing, meeting his deadline, and securing the vacation home that the whole family looked forward to visiting. In the end, the bridge loan helped everyone involved, including the buyer, seller, and their respective realtors.
Debt-to-income (DTI) ratio, a comparison of your monthly debt payments and gross income, helps lenders evaluate the feasibility of your mortgage payments alongside your existing financial obligations.
Yet, meeting the typical maximum DTI requirement of 43% for conventional loans can be challenging for many, especially those burdened with student loans or medical bills, leading to high debt, low income, and likely mortgage loan disapproval.
Here’s an example of how a bridge loan can save the day in this situation:
The borrower was under contract to buy a vacant lot where she plans to build a single-family home. As most borrowers do, she took her chance on applying for a qualified loan despite her DTI issues. Along the way, she was notified of the following problems with her application:
Too low income from her newly-acquired short-term rental properties;
Negative adjusted gross income due to self-employment; and
Unacceptably high DTI as a result of the aforementioned income limitations.
The borrower’s mortgage loan application was eventually denied by the first lender. Shortly after the denial, she found a collateral-based bridge loan that does not rely on her DTI. The bridge loan was closed quickly, and the purchase was completed within the agreed deadline. Because of the bridge loan, the borrower, the vacant lot’s seller, and their realtors closed the purchase the way they expected.
Traditional lenders often require a Verification of Rent (VOR) or Mortgage (VOM) to assess your creditworthiness through your history of timely rent or mortgage payments.
However, not all borrowers can provide these documents due to various circumstances, like living rent-free with relatives or residing in a partner-owned property, which can significantly limit their chances of securing a conventional loan.
Here’s an example of how a bridge loan can save the day in this situation:
A green-card-holder borrower was under contract to purchase a townhome in Florida. His lender asked him for a VOR or VOM, but since he was staying with his sister and was not paying her any rent, he could not provide rental payment history to the bank.
Despite his attempt to explain his living situation, his mortgage application was still rejected. The deadline was coming close, and only a bridge loan could save him from losing the townhome and his hard-earned deposit. After making up his mind, the borrower was able to secure a bridge loan and finally close his townhome purchase in just a week. The buyer, seller, and realtors were all delighted by how the bridge loan saved them at the last minute.
Traditional lenders often have sourcing and seasoning requirements, demanding borrowers to trace and document the origin of funds for down payments and closing costs, a task some, like independent contractors, may struggle with.
Seasoning requirements, which mandate funds to be in the borrower’s account for a specified period (at least 30-60 days), can similarly pose a challenge, particularly if funds were recently received or if a closing deadline is imminent.
In cases like this, a bridge loan may take over. Bridge loans typically do not have seasoning and sourcing requirements, well suited for urgent needs for funds.
Sometimes, qualified borrowers still see themselves rushing to bridge loans at the last minute not because they missed any requirements but because of limitations on the part of the lenders.
In these time-sensitive scenarios, bridge loans offer a feasible and reliable last-minute alternative to ensure that the planned purchases or refinances will push through. At the end of the day, a bridge loan can save you, the seller, and the realtors and others on your team from the headache of applying to lenders who cannot meet your due dates and requirements.
A bridge loan helps buyers immediately acquire undervalued properties or prevail in competitive real estate bidding situations. For example, if you find a great deal on an office building in a prime location or want to have that luxury property in a hot neighborhood, a bridge loan can help you close the deal quickly before another buyer comes into the picture.
By applying directly for a bridge loan, you can ensure that you do not miss the residential or commercial property that you so wanted to have. In cases like this, it is important to find a bridge loan without a pre-payment penalty so you can immediately shift to a permanent, long-term mortgage loan once you have secured the property.
Traditional lenders do not accept loan applications from foreign national borrowers who reside or earn income in countries perceived by the U.S. as economically and politically risky. These countries are listed under the OFAC Sanctioned Countries and include Afghanistan, Burma, Cuba, the Democratic Republic of the Congo, Egypt, Iran, Iraq, Liberia, North Korea, Russia, Somalia, Sudan, Syria, Ukraine, Venezuela, Yemen, and Zimbabwe.
Though foreign nationals from these countries may face difficulties, purchasing or refinancing real estate in the U.S. is not impossible. Through a bridge loan, they can finance their purchase of a vacation home, investment property, or commercial real estate.
To explore other options, here are other home loans for non-U.S. citizens.
Traditional lenders review your credit report as a means of ensuring your capacity to repay. If you have a recent negative event that appears on your credit report or background report, you should be ready to go straight to a bridge loan lender.
We’ve helped clients secure bridge loans despite recent negative credit events, such as bankruptcies, foreclosures, failure to pay SBA loans, U.S. tax liens, and child support arrearages.
Foreclosure bailout is by far one of the most common reasons why borrowers seek refinance bridge loans.
Foreclosure bailout loans are a type of financing specifically designed to help homeowners avoid losing their property due to foreclosure. These loans typically provide enough funds to pay off the default amount and halt the foreclosure process.
While these loans can provide a temporary solution, they often come with higher interest rates and fees, given the high risk associated with borrowers in financial distress.
Learn more about DAK Mortgage’s foreclosure bailout loan options.
DIP financing is a unique type of bridge loan designed for businesses that have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and still have “possession” of the property in question.
As a Chapter 11 requirement, businesses still need to continue their operations during the bankruptcy proceedings. However, many of these companies do not have the cash flow anymore and would face a hard time paying their vendors and suppliers.
In response, DIP financing offers liquidity to these business borrowers in the form of a bridge loan. With the cash on hand, the companies can continue their operations and regain confidence among their suppliers and customers.
Read our DIP financing guide for more information.
You have an existing mortgage that requires a balloon payment at the maturity date. Unfortunately, the money you are expecting was delayed, and the lender is strict enough to decline your request for an extension. With maturity just around the corner and a huge sum that is impossible to generate in an instant, a refinance bridge loan can save the day.
With a bridge loan, you can quickly find funds to make the balloon payment and pay off your first mortgage loan. It makes sure that you get to keep your property despite the delay in your funds. Once the expected funds arrive, you can then pay off the new bridge loan. You may also seek long-term financing if your situation permits.
In periods of uncertainty, unexpected situations may arise. A family member could require immediate medical attention, your business may face difficulties, or you might decide to purchase a new property or renovate an existing one.
Regardless of your needs, you can tap into your property’s equity through a bridge loan.
A refinance bridge loan operates by securing a new loan and cashing out the difference between any existing mortgage and the new bridge loan. The borrower receives the difference in cash, potentially with more favorable rates and terms. This money can then be used for any purpose.
In the process of a divorce, partners need to negotiate and determine the distribution of their shared assets. As a marital home is commonly jointly owned, the spouse who retains the property has to refinance it to fully eliminate the other partner’s interest, effectively putting it solely in their name.
Much like the other scenarios we’ve examined, this situation calls for urgent action due to court-imposed deadlines. Here, a refinance bridge loan can expedite the settlement process, alleviating the stress inherent to the divorce and the related issues it entails.
Like all financial instruments, bridge loans come with their advantages and disadvantages. Here are the pros and cons of a bridge loan.
Speed: Bridge loans in real estate can be processed quickly, often in a matter of days. This is crucial for situations where time is of the essence.
Flexibility: These loans can be structured to suit a variety of needs, making them an attractive solution for different circumstances.
No Early Repayment Penalties: Unlike some long-term loans, bridge loans typically don’t carry penalties for prepayment.
Higher Interest Rates: Because of their short-term nature and high risk, bridge loan financing typically comes with higher rates than traditional loans as well as higher origination fees.
Risk of Default: If the long-term financing does not come through or the asset being sold doesn’t sell, you risk defaulting on the loan.
Multiple Costs: You could end up paying for two mortgages plus the bridge loan until you can sell your first property, which can cause financial strain.
When it comes to the question of who offers bridge loans, a variety of lenders step into the picture, beyond the scope of traditional banks. Since bridge loans are specialized and short-term, they’re typically offered by entities that are well-equipped to handle the unique requirements and risks associated with this type of financing.
Alternative lenders, such as private lenders, hard money lenders, and some investment companies, are the most common providers of bridge loans.
Private lenders and hard money lenders operate with less regulatory oversight compared to traditional banks, giving them the flexibility to offer these unique loans. Moreover, some investment companies have funds dedicated to bridge loans, providing them as an investment opportunity for their clients.
Comprehending the terms and conditions of a bridge loan is crucial. Each bridge lender has different terms, interest rates, and loan structures. Therefore, a thorough investigation and comparison of various bridge loan lenders are imperative to make the right decision.
That’s where DAK Mortgage comes in. As a mortgage broker in Miami, we connect borrowers with a wide range of bridge lenders. Our team ensures that you have access to the best bridge lenders suited to your specific needs and circumstances. We work diligently to guide you through the process, providing you with the information and support needed to make an informed decision.
Remember, a bridge loan is an important financial commitment. Being well-informed about your chosen bridge lender’s terms and your own financial readiness is key to making the most of this short-term financial solution.
Residential bridge loan lenders specialize in providing short-term loans for individuals who are buying a new home before selling their current one.
This is where residential bridge loans come into play, offering the necessary funds to facilitate a smooth transition between properties.
These lenders understand the unique challenges and timing issues associated with residential real estate transactions and thus structure their loans to meet these specific needs. It’s crucial to note that the property’s appraised value determines the size of residential bridge loans.
On the other hand, commercial bridge loan lenders cater to businesses and investors in need of short-term financing for commercial real estate transactions.
This may include funding for property renovation, quick property acquisition, or simply providing a cash flow cushion while arranging for more permanent financing.
Commercial bridge loan lenders focus on the value of the commercial property being used as collateral. They are often well-versed in the complexities of commercial real estate and can structure loans to cater to the specific needs of their borrowers.
With commercial bridge loans, businesses can secure the funds they need without the often lengthy process associated with conventional commercial loans.
Looking for a bridge loan in Florida? Based in South Florida, DAK Mortgage can help connect you to a local bridge lender for residential or commercial real estate.
Bridge loans can be an effective solution for immediate financing needs, but it’s important to consider your financial situation, risk tolerance, and other financing options before proceeding with a bridge loan mortgage. Always consult with a financial advisor or lending professional to ensure you’re making the best decision for your circumstances.
Given that bridge loans are a temporary form of financing, borrowers should have a clearly defined exit strategy ready before their maturity date to avoid issues. In essence, a bridge loan gives borrowers leeway to address the problems preventing them from qualifying for a traditional mortgage and giving them time to find a permanent loan that suits their cash flow better.
DAK Mortgage can get you a bridge loan and help you qualify for a long-term loan before the bridge loan’s maturity date. Contact us to discuss your options and start your application.
Securing a bridge loan is typically easier than getting a conventional loan. Rather than focusing on a borrower’s personal financial situation like credit history or debt-to-income ratio, bridge loans are mainly collateral-based. This means the loan approval depends on the value of the property you’re using as security.
When applying for a bridge loan, your credit score isn’t a factor. There is no minimum credit score required. Lenders focus on the property’s value, not your creditworthiness. The loan is collateral-based, meaning the property you’re securing against the loan matters most, not your personal financial history or credit score.
The worthiness of a bridge loan depends on your specific circumstances. If you need immediate funding for a time-sensitive investment, or you’re awaiting the sale of a property, a bridge loan can be beneficial. However, due to higher interest rates, it’s crucial to have a solid repayment strategy.
Bridge loans are typically paid back in one lump sum at the end of the loan term, rather than in monthly installments. This final payment usually comes from the sale of a property or the securing of longer-term financing, as bridge loans are often temporary financial solutions.
Yes, bridge loans require monthly payments, but these are typically interest-only payments. The principal amount isn’t paid off month by month. Instead, it’s paid back in full at the end of the loan term, usually through the sale of a property or obtaining long-term financing.
Traditional banks typically do not offer bridge loans. These specialized, short-term loans are more often provided by alternative lenders such as private lenders, investment companies, or hard money lenders, which are more equipped to handle the unique characteristics and risks associated with short-term bridge loans.
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David A. Krebs
NMLS # 285280
DA Krebs, Inc. dba DAK Mortgage
NMLS # 1922428
1080 Brickell Avenue, #3106
Miami, Florida 33131
