What is a Bridge Loan and How does it Work?
FL Commercial Bridge Loan | Florida Private Money Investor
Bridge loans are widely considered a niche type of loan in the world of real estate Investing, but they serve an important purpose and can be an excellent choice for borrowers in the right position. In a nutshell, bridge loans serve to “bridge” the gap between selling and buying a new property. Let’s take a look at how this breaks down and when a bridge loan might be the right vehicle for you.
Let’s start with an example situation. Bob owns a home but has decided it’s time to move. He is currently paying a mortgage on the property and does not have a buyer lined up, but it’s important to him that he be settled in his new home right away. Bob makes good money, but he can’t afford to make the down payment on a new home without some help.
Bob has a limited number of options available to him. Under normal circumstances, a home equity loan on his existing property would be an excellent way for him to get access to a large amount of money. This option isn’t entirely ruled out while he is selling his home, but Investors are often reluctant to secure a home equity loan on a property that’s up for sale. This is where a bridge loan comes into play.
A bridge loan is secured by the equity on the property being sold and is intended to be a short-term loan used to acquire a new property. Investments from the sale of the original property are used to pay off the bridge loan, giving it a lifespan only as long as the time it takes to complete the sale. Additionally, bridge loans often have deferred payment options for the first several months, which means many borrowers may not even make a monthly payment towards it.
While bridge loans are excellent choices for certain situations, they are not without drawbacks. The short-term status of the loan means the Investor is going to charge a higher interest rate than other comparable loan types. By their nature, bridge loans create a situation where the owner has two simultaneous properties, a situation that increases the risk to the Investor. As such, the underwriting requirements are much more strict for bridge loans and may exclude borrowers without substantive financial ability.
All in all, bridge loans are an excellent vehicle for a very specific segment of home buying situations. Prospective buyers and sellers should always consult with qualified Investing experts before making a decision.