Many investors turn to a short-term bridge loan to secure a new property while they are still in the process of selling their current property. With different terms than a traditional loan, bridge loans offer the advantage of having a quick financing option for sophisticated real estate investors; or for the seller that is simply in a strap for cash while having to move out of their current property quickly. No matter what your reasoning may be, you might be wondering if a short-term bridge loan is right for you. Here’s how to know if a short-term bridge loan is suitable for your real estate goals.
What’s a Bridge Loan?
A bridge loan is a short-term financing option that’s used while a person acquires more permanent financing or removes an existing obligation. Most commonly used in real estate, bridge loans can be used to purchase a new home while the buyer waits for their current home to sell. These loans are secured by collateral, usually the borrower’s current home. Bridge loans are considered to be short-term loans with a payback period of six months to a year, making them have a higher interest rate when compared to traditional long-term loans.
How Does a Short-Term Bridge Loan Work?
Short-term bridge loans work to “bridge the gap” between the purchase of a homeowner’s new property and the sale of their old property. Many investors take advantage of this option as it can be difficult to secure a contract to sell a home and close on a new one within the same period. Investors prefer bridge loans for many reasons, and they can be beneficial in a seller’s market since they hold no contingencies. Here are some pros and cons to short term bridge loans:
- Can take away financial contingencies
- Quick financing
- You can avoid private mortgage insurance
- Higher interest rates
- Balancing two mortgages at once
- Must meet lender’s requirements
In situations where you need quick financing, bridge loans can be used to assist in job transfers and other situations where you need cash immediately for a new home.
How to Know if a Bridge Loan is Right for You:
Since bridge loans are short-terms loans usually provided by private lenders, there are different requirements than traditional loans. The typical requirements a private lender will have for a bridge loan include:
- Personal debt-to-income ratio
- Current home equity
- Your household income
- Your credit score
Depending on your short term and long-term real estate goals, a short-term bridge loan may be the perfect option for you. In the short term, a bridge loan can secure financing on a property with no contingencies. In a seller’s market, having no contingencies on your offer can make your offer more attractive. For properties with many prospects that are bound to sell fast, a bridge loan can give you an upper hand compared to financing with a traditional long-term loan.
Don’t let the perfect property slip out of your reach, use a bridge loan to quickly secure the financing for the property and persuade the deal with zero contingencies. As a selling strategy, a bridge loan is helpful when you need to offload a property but you want to purchase a new one at the same time. Your capital from selling the property can be put towards paying back the bridge loan, making it a feasible option for investors.
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.