What To Know Before Applying for Bridge Loans

Written by  //  August 13, 2021  //  Home Construction  //  Comments Off on What To Know Before Applying for Bridge Loans

For any real estate investor, having ready financing is vital. Without sufficient cash flow, investors cannot bid and close on high-demand properties. Unfortunately, since most conventional bank loans are long-term mortgage loans, these financing options do not offer the flexibility that most real estate investors need.

Fortunately, bridge loans are an alternative type of hard money loan that can provide immediate and flexible financing for real estate investment projects. To learn more about what to know before applying for bridge loans, continue reading the article below.

Homeowners Can Take Bridge Loans Out Against Their Current Home

Bridge loans bridge the gap between homeowners and investors having financing to buy and sell their homes. For example, if a homeowner needs to bid on a prospective property but has not sold their home yet, they can apply for a bridge loan.

This financing will allow the homeowner to stake their current home as collateral to borrow hard cash for the new property.

The Application Process Is Faster

Compared to the several steps of application and review necessary for conventional bank loans, borrowers can receive bridge loans fast. Since private lenders most commonly provide bridge loans, the process of underwriting and applying for these loans requires fewer formalities and financial credit checks.

They Typically Last a Year

Since private lenders offer bridge loans as a temporary source of cash flow, borrowers should repay these loans within a year of approval. Private lenders may have alternative or specific timelines, but all bridge loans are short-term sources of financing.

Before applying for a bridge loan, borrowers should always have a detailed repayment plan.

Borrowers Must Pledge Collateral and Have Home Equity

If a homeowner or investor does not take out a bridge loan against their current residence, they must pledge other assets as collateral. Along with this collateral, most private lenders also require that borrowers have a minimum of 20 percent equity in their current residence. Without this equity, most private lenders will not approve bridge loans.

Associated Bridge Loan Costs

The convenient and rapid rate that borrowers can receive approved bridge loans vs. traditional bank loans generally makes the interest of bridge loans higher.

As a result, borrowers can expect to pay interest rates that average 10 to 25 percent on most bridge loans. In addition, homeowners and investors should expect to pay several associated closing and loan fees. Review the list below to see some of the typical associated bridge loan costs.

  • Escrow fee
  • Loan origination fee
  • Closing transaction fee
  • Appraisal Fee
  • Notary fee

Bridge loans are a convenient and effective form of financing for homeowners and investors. We hope our guide on what to know before applying for bridge loans has helped simplify this financing method. If you’re a property owner who needs immediate cash flow to close on new properties, consider consulting with bridge loan lenders to assess your loan options.

image credit: twenty20.com

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