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When it comes to financing a real estate deal, you really only have a few options to choose from. It’s great if you’re able to purchase properties in all cash, but most people will go the route of taking out a loan from a traditional financing provider like a bank. The problem with traditional loans is that they have strict guidelines for the properties that can qualify for them, and their turnaround time can be very long. That’s why for many real estate investment scenarios, a bridge loan is the better solution. In this article, we compare bridge loans and traditional financing options to help you determine which is the best solution for your next investment project.
What is a bridge loan?
If you’re unfamiliar with bridge loans, they are a form of financing provided by private lenders that operate in the real estate space. Bridge loans are short-term, and usually taken out for periods between 6 and 24 months. They can serve many different purposes, but they’re intended to “bridge” the gap between the purchase of a property and being able to secure permanent funding for it. Using a bridge loan gives you the opportunity to acquire property immediately and gives you time to repay the loan once you have the available funds, such as after the sale of a previously owned home. Bridge loans will typically have higher interest rates than standard 30-year mortgages, due to their short-term nature.
Investment types
The type of investment you’re looking to make will help determine which form of financing you’ll need. For example, if you plan to hold on to a property for rental income, you’ll probably be looking for a loan with a 30-year term, such as an FHA loan. Bridge loans are better suited to short-term deal scenarios, like for home flipping. In fact, you may have trouble obtaining financing from traditional lenders for the purpose of home flipping. They may view your investment as too risky when compared to the typical properties they issue mortgages for. Alternatively, many private lenders have programs designed for flipping, with loans that also include the cost of renovations for your project.
Time frame
As we mentioned, the short-term nature of bridge loans makes them great for scenarios where you will be selling a property quickly. But another benefit of using bridge loans is their low turnaround time. Traditionally, loan applications can take weeks or months to be approved, while a bridge loan can deliver funds in as little as 10 days from the application date. This makes them perfect for time-sensitive scenarios, like with those great deals you know won’t last long on the open market. A bridge loan lets you place an all-cash offer on a property, which can also help you stand out from competing offers.
Down payments
One way bridge loans differ slightly from traditional financing options is when it comes to down payments. The gold standard for a down payment on a typical mortgage is 20-25%, with the lender financing the other 75-80% of the sale. In certain cases, you’re even able to qualify for a loan with less than 20% down, like with FHA loans. On the other hand, bridge loans typically have a minimum of 20% down, and they will often require a personal guarantee from you that you’ll repay the loan, which is known as a recourse loan.
The other type of bridge loan is a non-recourse loan. This type of loan doesn’t require a personal guarantee. If you were to default on the loan, this allows the lender to foreclose on the property in an attempt to recoup their debt, but it will not affect your personal finances. For this reason, non-resource loans will typically require a higher down payment. Knowing these differences can help you choose a loan that better fits your personal comfort level.
RCN Capital
Do you have a real estate project you would like to obtain financing for? RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to acquire a Bridge Loan on a property, RCN Capital has competitive loan options available.Connect with us todayto discuss your next real estate investment.