It’s not uncommon for investors to hear misconceptions about real estate loan options. We’re here to get the facts straight, here’s 5 common misconceptions about bridge loan financing that you may have heard through the grapevine.
5 Common Misconceptions of Bridge Loans
It’s a Last Resort
A common misconception of bridge loan financing is that it’s a last resort for investors, but this is not the case. In fact, many investors leverage bridge loans in their portfolio for strategic reasons. Depending on market conditions, a bridge loan can be used to give you an extra boost in a seller’s market. The access to quick financing is attractive for a seller, which makes them more likely to choose your bid. For an investor looking to acquire more liquidity while in the process of selling off their existing property, a bridge loan can be leveraged for quick financing without requiring you to sell off your other assets. It’s important to make sure every dollar of yours is generating more income; bridge loans can help you accomplish exactly that.
It’s Too Expensive
Many investors hold the misconception that bridge loans are too expensive since this sector has become increasingly competitive in recent years. Since bridge loans are short term loans, you can expect to pay a higher interest rate than a conventional loan. Conventional loans are generally held for longer periods of time, which give them a more lenient interest rate. In the case of a conventional loan, when paying it off early you will be faced with large fees and penalties. Although bridge loans have a higher interest rate, they do not carry the same early repayment fees and commitment of long-term loans. The tradeoff with bridge loans is that their-term short nature is frequently used to maximize profits, saving you money in the long run.
The Penalty for Defaulting is Severe
Similar to other types of hard money loans, bridge loans have specific terms and agreements that an investor must abide by. A common misconception about bridge loans is that they carry a high penalty for defaulting, which isn’t always the case. Depending on your lender, the rates and terms for your bridge loan will vary. Before applying for a bridge loan, be sure to thoroughly research your available lenders and their loan options. Penalties will vary from lender to lender, you might find some lenders have no penalties at all.
It’s Difficult to Qualify For
Although you might assume you need perfect credit or a large down payment to qualify for a bridge loan, many lenders are willing to work with applicants even if they do not have a perfect credit score. While having good credit will increase your chances of getting approved, it is not a requirement by many lenders since your loan will be backed by the collateral of your existing property. Lenders that are not associated with federal regulations or guidelines can set their own standards regarding the qualifications of their loans, making it easier for investors to get approved. Although it might seem like acquiring a bridge loan is challenging, many investors find it easier than it looks.
It Can Only Be Used for the Purchase of Property
Bridge financing can be used for a range of opportunities for an investor. A bridge loan is most commonly known for “bridging the gap” in liquidity when you are selling your existing property and purchasing a new one. In recent years, bridge loans have become more popular for other uses such as development funding, major refurbishment of a property, or even paying a tax bill.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.