When it comes to the real estate world, there are more loans than you can shake a stick at. And to the uninitiated, those loans may all seem like the same thing. But With each different type of loan, there are rules and regulations that you need to be aware of. Bridge loans, in particular, require quite a bit of explaining.
Understanding How Bridge Loans Work
Bridge loans, also known as hard money loans, are a short-term loan that allows the property owner to borrow against the equity in the home to purchase a new property. After the new property is purchased, the previous property is sold. This pays off the loan balance to the bridge loan lenders.
Bridge loans can be used for both commercial and residential real estate transactions. In this case, the borrower can be a homeowner looking for a new home or a real estate investor that is looking to purchase new real estate.
The steps are pretty simple. The first step is to borrow against the equity in the existing property, obtaining that hard money loan from the bridge loan lender. After that has been achieved, use those funds to purchase the new property. Then, move from the previous property to the new property and sell the former to pay back the hard money lenders.
Misconceptions about Bridge Loans
There are plenty of buyers out there that will refer to any temporary or short-term loan as a bridge loan. While the term is certainly used to describe temporary financing, it doesn’t truly represent what the definition of a bridge loan is.
Bridge loans are meant for those living in their current home but are looking to purchase a new home. The hang-up is that they don’t have the cash on hand for an all-cash offer or even a down payment. They do, however, have a large amount of equity in their home.
Here’s the difference: without a bridge loan, that family would have to sell its home to fund the new property. They would sell their home and then live in a rental property as they find their new home.
With a bridge loan, that same family could purchase their new home and move into it right away without having to wait for the sale of their home to come through. It substantially cuts out that waiting period, allowing the family to get the home they want right away.
Where to get a Bridge Loan
Generally speaking, most credit unions and banks won’t offer hard money loans because they prefer to fund longer-term loans. Hard money lenders tend to be private, short-term lenders that will provide the funding needed for bridge loans.
The caveat here is that these private hard money lenders tend to have higher interest rates than more conventional lenders out there. Despite these higher interest rates, it is easier to get approved and funded, getting the money that you need in a much shorter period than through traditional lenders.
Under normal approval processes for an owner-occupied property, the approval and funding of a hard money bridge loan can take 2-3 weeks, whereas a bank bridge loan can take 45 days or more. In the case of the real estate being used as collateral is an investment property, that hard money bridge loan can get approved and funded inside of a week.
RTI Bridge Loans is a highly experienced bridge loan lender in California, serving Los Angeles County as well as Orange County. Contact now or call us at (562) 857-2285
A Caveat in Repayment
There can be an exemption for paying back the loan, known as the Ability to Repay Rule. If the bridge loan is under 12 months, buyers are exempt from that rule. This is because the existing property that is being sold acts as the repayment for the loan. As soon as it is sold, the loan is paid off. This means that income documentation on the buyer’s end is not under the same microscope as it would be for a longer-term owner-occupied loan.
Those other owner-occupied loans mean that the borrower has to meet the ability mentioned above to Repay requirements. They do this by providing their income with other forms of third-party documentation like W2s, tax returns, or pay stubs.
Not needing to provide proof of income can be helpful for some individuals like seniors or retirees, those without significant income over the past few years, and self-employed individuals.
Bridge Loans Rates, LTV, and Fees
Generally speaking, bridge loan lenders are private and offer rates in the range of 8-11% depending on things like the lender, property involved, location, the strength of the borrower, and requested loan to value.
Another thing to consider is that the bridge loan lender will likely charge 1.5-3 points (1.5-3%) as an origination fee, and they may also add expenses to the loan that will be called either application fees, processing fees, or document fees.
Qualifying for a Bridge Loan
The qualification process can be quite straightforward. The borrower has to fill out a loan application that will be provided by the hard money lender, and the borrower has to have enough equity in their property based on the loan amount to make the monthly mortgage payment while the bridge loan is outstanding.
With the Ability to Repay Rule not applying, income qualification and documentation based on debt to income ratio are not nearly as important as it would be to a permanent owner-occupied loan. So long as the borrower has sufficient equity in the existing property, most hard money lenders will overlook negative issues like poor credit in the borrower’s history. These other negative issues can include short sales, loan modifications, a deed in lieu, foreclosures, or bankruptcies.
That bridge loan can be just what a borrower needs to get the home that they have been eyeing without having to wait on selling their existing home first. With the ease of the quick approval and funding by RTI Bridge Loans, there is a reason that bridge loans are as standard as they are. Get the home that you have been looking into without the hassles of the traditional buying process.