Individual investors and small real estate businesses sometimes use bridge loans when they need short-term financing. These loans are approved much faster than traditional loans, so investors don’t have to delay their property purchase. Because a bridge loan is only used for a short time, borrowers pay very little interest overall. Read on to find out more about this financial product and whether you’re eligible.
What Are Bridge Loans, and When Are They Used?
A bridge loan is a short-term financial instrument used to cover an individual or business’s costs until a more permanent solution can be found, or the asset is sold. The loan is usually backed by a tangible asset, such as a property or a business’s inventory. If the borrower fails to pay back the loan, the collateral can be seized by the lender.
The main advantage of a bridge loan is that it provides people with immediate access to funds when they need them the most. In the real estate industry, this type of financing is used by people who are waiting for their current property to sell but would already like to purchase a new one, or by those who are flipping a property.
While Waiting for a Current Property to Sell
At the beginning, most real estate investors complete one sale at a time. As soon as your first property is sold, you use the money to purchase and rehabilitate a second one. This can be repeated multiple times, and you might make a 10-20% profit each time. But sometimes, a great deal comes along before you’ve sold your previous project.
If you’ve found a property with a lot of potential, but you’re still waiting for your most recent investment to sell, a bridge loan could be the perfect solution. It allows you to purchase the new home so you don’t miss out on a good business opportunity. It’s important to note that you’ll be paying for both the bridge loan and your mortgage or fix-and-flip loan on the old place at the same time. Make sure you have enough financial resources to cover both payments.
When Flipping a Property
Fix-and-flip loans are best for people who want to buy cheap property, renovate it, and sell it for a higher price because these kinds of loans also provide financing for the renovation costs. But sometimes, property investors purchase homes that don’t need to be renovated. If you buy a cheap house that is in good condition, an as-is bridge loan might be a better option.
You use the loan to purchase the home, stage it for viewings, then put it on the market for a higher price. At Turning Point Lending, we offer an as-is lending program that covers 90% of your costs. Our loans are worth up to $2 million, and the term is typically12 months. If you’re selling a property with up to four units, reach out to ask us about our as-is bridge loan program.
Why Choose a Bridge Loan Over a Traditional Loan?
A traditional loan is much more difficult to obtain than a bridge loan, so it isn’t suitable for people who need funding right away. Because an asset backs the bridge loan, lenders can be more flexible, and the approval process is shorter. This is excellent for people who would like to purchase a property right away.
The interest rate of a bridge loan is almost always higher than that of a traditional mortgage, but this doesn’t mean you’ll end up paying more. Because the loan term is so short, you’ll spend much less than someone who buys and holds a property in the long term.
Where Can I Get a Bridge Loan?
Bridge loans can be obtained from various financial institutions like banks or credit unions. However, there are often very strict and specific requirements. Traditional banks won’t issue you a bridge loan unless you have an excellent credit score and your debt-to-income ratio is very low. For most people, it’s easier to contact a hard money lender, who might be more flexible.
At Turning Point Lending, we understand the unique needs of investors because our founders, Scott Thomas and Jim Dougherty, have been working in real estate for many years. We accept both new and seasoned investors, and we always aim to build long-term relationships with our borrowers.
Who Is Eligible for a Bridge Loan?
Before offering you a bridge loan, your hard money lender will check your financial situation to make sure you’ll be able to pay them back. You might need to provide them with financial statements, information about your assets and liabilities, your credit score, and information about your past real estate experience. The lender will also ask you about the property you’re purchasing. They might require an independent appraisal to find out how much it’s worth.
Your Credit Score
Every person has a FICO score, which is a measure of their creditworthiness. The score ranges from 300 to 850, and it helps lenders to determine whether you’re a risky or safe borrower. If you have a score of 800-850, you’re considered an exceptionally responsible borrower, and you’ll benefit from the best deals out there. People with a score of 740-799 can also expect excellent interest rates because they are well above average.
A score of 670-739 is considered average or slightly above average, so these borrowers can expect good interest rates, but they might miss out on the top deals. Anything below 580 is considered poor, so if your score is this low, you might struggle to gain access to funding. A traditional bank is unlikely to offer people with a low score a bridge loan, but a hard money lender might consider them if they can demonstrate that their financial situation has improved.
Your Debt-to-Income Ratio
Your income is an important consideration because it determines whether you’ll be able to repay the loan. If you already have a lot of debt and your income is low, lenders might be reluctant to issue you a bridge loan because you’ll struggle to pay them back. On the other hand, someone who has a high income and very few liabilities is a good candidate.
Your Previous Real Estate Experience
Many hard money lenders are willing to work with brand-new investors as well as seasoned professionals. However, those who have never flipped a house before are considered riskier borrowers because they might make mistakes, and they typically have more trouble determining which property is a good deal. Therefore, they are less likely to get offered the best interest rate possible.
If you’re a new investor, one of the easiest ways of improving your profit margins is to build up a long-term relationship with a lender. Over time, you’ll become a trusted partner, and you’ll be offered better deals.
Bridge loans are suitable for people who would like to flip a property or purchase a new one before the sale of the old one goes through. They are fast, flexible, and convenient. Although the interest rate is higher than mortgage rates, investors pay much less due to the short loan term. Reach out to us at Turning Point Lending to find out more about the kinds of funding we provide, or fill in the online application.