3 Things to Know About Bridge Loans Before You Apply
Some types of lending are so common that almost everybody understands them. Auto loans and mortgages are at the top of the list. Other types of lending, not so much. Consider bridge loans. We do not hear a lot about them. And when the subject does come up, it’s often not in context.
Bridge loans could be the most misunderstood type of financing out there. And now, with residential real estate being as hot as it is, people are getting all sorts of unsound advice about bridge loans.
Actium Partners is a Salt Lake City, UT private lender that specializes in bridge loans and hard money. They say bridge loans represent a unique form of lending that isn’t available to everyone. Bridge loans also are not appropriate for every need.
According to Actium Partners, there are three things you should know about bridge loans before you apply for one:
1. Not for Primary Residences
An oft heard piece of advice these days is to apply for a bridge loan so that you can buy a new house while you’re selling the old one. If you’ve heard that, forget about it. Only on rare occasions do banks make bridge loans to cover transactions on primary residences. It is just too risky to saddle homeowners with two mortgages.
Bridge loans for real estate are generally made to investors and property developers. These types of borrowers tend to have a more solid exit plan in place. They are not relying on the sale of another property to repay the bridge loan.
2. They Are Short-Term Loans
Bridge loans are short-term loans by nature. The name says it all. A bridge loan is intended to bridge the gap between an immediate need and future financial resources. For purposes of illustration, think of a property investor looking to buy a multi-unit rental property.
Provided all of the units remain rented, the property should generate a stable amount of revenue every month. The property itself can also be liquidated in the event of default. Those two things combined make the property a perfect candidate for a bridge loan. Purchasing the property is the borrower’s immediate need; rental payments represent the future resources he will use to pay the loan.
3. They Are Asset-Based
The third thing to know is that bridge loans are asset-based. What does that mean? It means that lenders are more concerned about the value of the borrower’s assets than their income or credit rating. This is easily illustrated by going back to the previous example.
If Actium Partners were to consider a bridge loan for the property investor, they would look closely at the value of the property in question. They would appraise its current market value along with its expected rental value. They would only make the loan if their appraisal demonstrated a value higher than the amount to be borrowed.
All of this matters because the property could be seized and sold should the investor not make good on the loan. Borrowers looking for hard money must be cognizant of the fact that whatever asset they use as collateral is at risk for as long as the loan remains outstanding.
Bridge loans are valuable tools for meeting certain short-term financial goals. Investors, property developers, and business owners utilize them all the time. They are rarely the right tool for people looking to finance the purchase of a primary residence. If that sounds like you, do not count on being able to get a bridge loan from your mortgage lender. You will have to make other financing arrangements.
