Thinking about using a bridge loan to help fund your next real estate investment? Here’s everything you need to know about bridge financing.
What is a Bridge Loan?
A bridge loan is a type of short-term loan that is used when an investor needs help “bridging the gap” between buying a property and selling a previous one. Some investors prefer buying another property before taking profits from their previous sale, meaning they won’t always have enough liquid cash to cover a down payment. A bridge loan is commonly used to help cover this.
How Does a Bridge Loan Work?
A bridge loan works by borrowing against your previous property to obtain funds for your new property. That way, if you were to default on the loan, the lender retains their investment by acquiring your property. This strategy lowers the risk for both lender and borrower, giving both parties more flexibility when it comes to the terms and conditions of the loan. One of the most common uses for a bridge loan is for covering closing costs. Although terms may vary, it’s standard to borrow a maximum 80 percent of both your home’s value and the value of the home you wish to buy.
How to Get a Bridge Loan
Although bridge loans offer more flexibility than a conventional loan, your lender will still take several factors into consideration such as your debt-to-income ratio, your household income, and how much home equity you have before finalizing your bridge loan. If you’re looking to get a bridge loan, it helps if you’ve been a good mortgage candidate with your first home.
For those who do not have a decent amount of equity in their current homes, it might be more difficult to acquire a bridge loan. If your lender determines that you’re an ideal candidate, you may experience a faster approval process for a bridge loan than you did for a traditional mortgage.
Pros of a Bridge Loan
What are the pros of acquiring funding using a bridge loan? On top of its astounding flexibility, you can expect your bridge loan to bring you benefits like:
Leverage in a seller’s market
Bridge loans are preferred by seller’s for their quick approval times.
Avoid private mortgage insurance
Bridge loans do not adhere to federal regulations, meaning no requirements for private mortgage insurance.
Bridge loans are some of the fastest loans to be approved on the market; in as little as one day you can get approved for funding.
Cons of a Bridge Loan
Every good thing has it’s cons- including bridge loans. Here’s the cons to watch out for when using a bridge loan:
Higher interest rates
Since bridge loans are short-term loans, they generally carry higher interest rates than conventional loans. Although these rates tend to be higher than conventional loans, the short-term requirements of a bridge loan encourage investors to pay them off quickly, making them the better option for investors who do not want to commit to a 30-year mortgage.
Two mortgage fees
When a bridge loan closes, you’ll start paying it back along with your actual mortgage. Some investors find it difficult to manage two mortgage fees at once, but this will only occur for a short-span of time while you wait for your previous property to sell.
Can be hard to qualify for
If your finances do not meet lender requirements, it can be difficult to qualify for a bridge loan. Depending on your lender, they may be more willing to be flexible with loan qualifications depending on your prior experience and amount of collateral you have to offer.
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.