Are you a commercial property owner or developer in Los Angeles planning a new project while counting on funds that you are supposed to receive from the buyer of your existing property? You probably intend to use the cash for a new acquisition.
While this sounds good on paper, it is true that the closing dates of selling and buying real estate properties hardly ever align with each other. Should this happen, you might find yourself frustratingly stuck in a shaky act of financial balancing. That is where a well-reputed Southern California hard money lender like RTI Bridge Loans can help.
Read along to understand what a bridge loan is, how bridge lending works, when to use a bridge loan, and where to get bridge loans in Southern California.
Table of Contents
- » What is a Bridge Loan?
- » How Do Bridge Loans Work?
- » Is a Bridge Loan the Same Thing as a Hard Money Loan?
- » Types of Bridge Loans
- » Bridge Loan Example
- » When to Use a Bridge Loan
- » Bridge Loan Costs
- » Can I Qualify for a Bridge Loan in Southern California?
- » Bridge Loan Pros and Cons
- » Connect with a Bridge Loan Expert Today!
What is a Bridge Loan?
A bridge loan is a loan that facilitates funding gaps, just like bridges cover physical gaps. Homeowners and real estate investors use it to meet current financial obligations before securing permanent financing. These loans give you access to immediate cash flow when funding is needed but is not yet available.
A bridge loan attracts relatively high-interest rates, and you must back it using some form of collateral, such as a property or business inventory. People mainly use such loans in cases where a borrower expects to sell a property quickly or refinance soon.
How Do Bridge Loans Work?
A bridge loan can aid you in financing your purchase of new property when your current property on the market has not sold, or you have already sold it but are waiting for the payment of this sale. As you might have probably grasped, the symbolic use of “bridge” in bridge loans for real estate signifies that it assists in filling up the time gap that you may encounter in the transactions of buying and selling your commercial or residential property.
The concept behind bridge loans is that you will usually use your current home’s equity as leverage. You can use either of two options:
- Use the bridge loan to pay off your original mortgage and give you extra funding for a down payment on a new home. When the property sells, you then pay off the bridge loan.
- Use a bridge loan to create a down payment if you have already paid off your home but haven’t sold it yet. The bridge loan can help you get the down payment for your new home.
Bridge loans attract interest rates between 8.5% and 10.5%, making them more expensive than traditional, long-term financing options. However, the underwriting process for bridge loans is generally faster than for conventional loans. Also, if you can qualify for a mortgage, you can probably be eligible for a bridge loan as well—assuming you have the required equity in your current home. Bridge loans are therefore an excellent option for homeowners who need quick access to funds to purchase a new home before they have sold their current property.
Is a Bridge Loan the Same Thing as a Hard Money Loan?
In a sense, yes. A cash bridge loan is a short-term loan used to fill a gap in financing, often for property rehabilitation or commercial-purpose properties.
A hard money loan is a privately funded loan you secure solely based on the real estate asset’s value.
To an extent, these two terms are interchangeable.
While hard money loans always come from private lenders in Southern California, conventional lenders can sometimes offer bridge loans. Therefore, while most bridge loans are a type of hard money loan, this is not always the case.
So, while there is plenty of overlap between bridge loans and hard money loans, they are not entirely interchangeable terms. The main difference boils down to who makes the loan and how you can spend the funds.
Types of Bridge Loans
There are four types of bridge loans for real estate, namely:
- Closed bridging loans
- Open bridging loans
- First charge bridging loans
- Second charge bridging loans
While all types of bridge loans offer short-term financing, the terms differ slightly.
1. Closed Bridging Loan
A closed bridging loan is a short-term loan with a built-in exit strategy. The lender already knows how you will pay back the loan and at what date you can do this.
Investment property lenders in Southern California approve the loan based on verification of the arrival date of funds you are expecting. That makes the loan low-risk, and for this reason, the borrower may catch a break on the standard high-interest rates these types of loans attract.
A closed bridging loan is also more likely to be accepted by lenders as they have more certainty about repayment.
2. Open Bridging Loan
You need an open bridging loan if you’re unsure of the exact period you need the finance for.
To ensure the security of their funds, most Southern California private money lenders deduct the loan interest from the loan advance.
Open bridging loans are an ideal option for borrowers uncertain about when their expected finance will be available. Because of the uncertainty on loan repayment, hard money lenders charge higher interest rates for these private loans.
3. First Charge Bridging Loan
A first charge bridging loan gives the principal lender a first charge over the property. If you were to default, the first charge mortgage lender would have first rights on the property, meaning they will receive their money first before other lenders. Due to the low level of underwriting risk, these loans attract lower interest rates than second charge bridging loans.
4. Second Charge Bridging Loan
A second charge bridging loan is short-term financing on a property that already has some form of mortgage lending currently in place. Therefore, the existing mortgage takes priority in terms of repaying the debt, which makes the bridging loan second in the queue.
Second charge bridging loans carry a higher risk of default and, therefore, attract higher interest rates than first charge bridging loans. Second-charge loan lenders will only start recouping payment from the client after fully paying off liabilities accrued to the first charge bridging loan lender.
Bridge Loan Example
Let’s say you have a current home worth an estimated $120,000 and a $70,000 balance on your mortgage. If you were to get a $90,000 bridge loan, $70,000 would go toward clearing the mortgage, and then an additional $2,000 would go to closing costs. That leaves you with $18,000 for your next purchase — if the sale of your current home goes well, of course.
Even though most homeowners get a bridge loan to cover the costs between purchasing a new house and selling the current one, keep in mind that bridge loans rarely come with protections for the borrower if the sale of the old home falls through. In such a scenario, the private loans lender could go as far as to foreclose on the old property upon the expiry of the bridge loan extensions. The same could also occur if you face trouble selling your current property.
Given these risks, it’s vital to carefully consider a bridge loan based on what you can afford and how quickly homes sell in your local market.
When to Use a Bridge Loan
A bridge loan is perfect for when you are looking to buy a property in a hot market, and you know your home will sell.
Some of the reasons why you should consider a bridge loan are:
- You’re in a seller’s market in which houses sell quickly, and you’ve found your new home
- You want to buy a new home, but the seller won’t accept a contingency offer to sell your current home
- You want to close on a new house before selling your current home
- You can’t afford the down payment for a new purchase unless you sell your current home
- The closing date for your old home is after your settlement for the new one.
Bridge loans may also be a good fit for businesses looking to fund short-term expenses or capitalize on immediate real estate opportunities. Real estate investors can typically find these loans offered by Southern California hard money lenders, who finance loans using your property as collateral. Hard money loans generally charge higher interest rates than other business loans.
Some of the uses for business bridge loans include:
- Securing funds to acquire real estate quickly
- Capitalizing on limited time offers on inventory and other business resources
- Covering operating costs while you await long-term financing
- Fix and flip investors looking to fund their next property investment
Bridge Loan Costs
You are probably aware that bridging loans come with high-interest rates, but how much do bridging loans cost?
There are several separate elements to consider when calculating the overall cost of a bridging loan in Southern California.
A bridge loan’s interest rate usually depends on your creditworthiness and the size of the loan, but figures range from the prime rate, which is about 3.25%, to 8.5% or 10.5. Business bridge loans attract even higher interest rates that typically range from 15% to 24%.
Besides the interest, borrowers must also pay various mortgage and property-related fees, including:
- Application fee
- Appraisal fee
- Credit report fee
- Escrow fee
- Home inspection
- Origination fee
- Underwriting fee
- Title insurance and search
All these fees vary in cost by location and lender.
Can I Qualify for a Bridge Loan in Southern California?
While each hard money lender in California will have their requirements, here are some general guidelines they follow:
- Excellent credit. (at least 720)
- At least 20% equity in your home.
- Your home must be in a hot selling market.
If you aren’t confident your property will sell in good time, you shouldn’t try to get a bridge loan as it could easily backfire.
Bridge Loan Pros and Cons
Before looking for a Southern California commercial property lender, you need to decide if home bridge financing is right for you. Here are the advantages and disadvantages of bridge loans:
Bridge Loan Pros
- Creditworthiness isn’t a consideration for approval
- Loans are backed solely by property value
- Borrowers can get immediate access to funds, making bridge loans perfect for time-sensitive transactions
- Bridge loan financing gives you faster access to funds than the traditional loan process
- Bridge loans offer payment flexibility, as you can defer payments or make them interest-only until your old home sells
- You don’t need a contingency for bridge loans. A bridge loan provides the funding to settle on your new home even if the old one hasn’t sold yet
Bridge Loan Cons
- Higher interest rates in comparison to other forms of financing
- You might end up owning two homes at the same time, resulting in twice the mortgage payments and home management costs
- Most Southern California private money lenders require you to have at least 20 percent of home equity in your current home to consider your bridge loan request
- Bridge loans usually attract higher interest rates and APR compared to traditional loans
- Some hard lenders will only offer you a bridge loan if you agree to use their loan services for your new home mortgage
Connect with a Bridge Loan Expert Today!
“Of all the Southern California hard money lenders near me, which one should I choose?”
The key to obtaining the right short-term bridge loan is to make sure that you choose the correct lender.
Here at RTI Bridge Loans, we provide bridge loan financing services for businesses and developers across Los Angeles and Southern California. As the leading property bridging finance lender in California, we pride ourselves on creating long-term client-lender relationships. We have processed hundreds of millions of dollars in loans for our clients, and many of our clients still use us continually for their real estate financing needs.
Are you in need of short-term bridge financing for your business? Get in touch with us at (562) 857-2285 today! We look forward to closing your bridge loan and helping you achieve your real estate investment goals.