A bridge loan, also referred to as bridge financing or a swing loan, is a means of obtaining short-term financing for individuals who are looking to increase the value of their property or are in a financial pinch while they meet other obligations or during an interim period of acquiring permanent financing. Bridge loans are typically used in real estate and have a duration ranging from 6-18 months. These types of loans usually come with high interest rates and can also be attached to collateral such as property.
Here are a few scenarios in which bridge loans can help:
Purchasing a new investment property using a bridge loan in order to rehab it quickly and sell it for a higher price
Buying a property in a high-demand market while you wait for the proceeds from selling another property
Avoiding making a contingent offer on a new property where you’re competing against other potential buyers who may already have the funds
Acquiring permits and plans using a bridge loan to modify the property in a way that will improve your investment
Taking a bridge loan on a renovated home in order to give yourself a little more time to sell and recoup some of your investment or obtain long-term financing.
What are bridge loans used for?
Real Estate investors typically face tight deadlines to close and need capital quickly when a good investment opportunity presents itself. Bridge loans are typically funded faster than traditional loans but, in exchange for fast financing, the borrower faces a short loan term duration, larger origination fees, and high interest rates.
Bridge loans are about speed and giving a borrower more options, particularly in fix-and-flip. Borrowers need to buy a property with little money down, rehab it quickly without sacrificing quality, and sell as soon as possible. It’s all about maximizing return on investment (ROI). Borrowers will pay a little more in rate to juice up their ROIs with higher leverage.
Sometimes a borrower who is in the middle of a rehab can find that their lenders are not acting as a good partner on the deal. The lender might be holding up draws, slowing the project down or charging junk fees in order to make more money on a loan. Borrowers will look for a new partner who can provide a bridge loan to help them complete their project.
Another scenario is after a rehab has been completed. Sometimes, borrowers look for a bridge to give them a bit more time to sell a property. Imagine a house on the market in the dead of winter. The investor might feel they can sell for more if they wait until the spring buying season. Refinancing for term loans takes time, so the borrower may need a few months to secure that perfect term loan. A bridge loan could give them some time to secure the best possible exit to maximize their investment.
Another example is when a borrower is looking to change the legal classification of a property. If the borrower is changing the density or use of the house or doing ground-up construction or condo conversion, bridge financing can give them the runway to get the needed permits, approvals, or variances to increase the value of the property.
Borrowers should also be aware of closing costs when using a bridge loan, in addition to fees that can be upwards of 2% of the original value of the loan. These combined costs and fees are typically around a few thousand dollars.
How do bridge loans work?
Bridge loans are used in one of two ways in real estate, by either paying off an existing mortgage and refinancing into a new one or using the mortgage to acquire a property. Check out the following examples.
The borrower has bought a house for $300,000, put $100,000 into the rehab and now needs to spend another $100,000 to finish the project, with $300,000 of debt on the property. The investor could borrow up to 90% of the purchase price, plus sunk costs ($300,000+ $100,000= $400,000 * 90%= $360,000) and 100% of the remaining rehab ($100,000). So, as long as the as-is value is higher, the borrower could take out $60,000 in cash for the work they’ve done and have the rehab funds available to finish their project.
The borrower finds a house for $100,000 to purchase. She determines that if she puts $50,000 into the house, she can sell it for $250,000. The borrower would only need to come up with 10% of the purchase price ($10,000) and the lender would fund the rest. When the borrower sells, she will have doubled or tripled that $10,000 in just one year. Not a bad investment!
Both examples will only work for a borrower if they manage to sell their old home sooner rather than later in order to repay the loan and subsequent interest. If the old home isn’t sold in time, the borrower will be forced to pay both the full amount of the bridge loan on top of the existing mortgage payment, creating a greater risk for default.
While bridge loans provide homebuyers with a means of purchasing a new home in a tricky situation, borrowers should be ready to assume some level of risk when using these types of loans.
Benefits of a bridge loan
Gives sellers a quick way to access the equity in their investments.
Allows the buyer to quickly make an offer that’s not contingent.
Buyers can still make an offer when contingent offers aren’t accepted.
Effective in markets where homes sell fast.
Gives homebuyers peace of mind when the sale of their old house is pending.
Time to find the best plan for the asset.
Recoup some “sweat equity” invested in the project.
What kind of bridge loans does Haus Lending offer?
Our Multifamily Loan Program is perfect for small balance residential properties with more than 5 units. The minimum loan amount is $500,000. With rates starting at 6.49% it’s perfect for rehabbing a multifamily property.
For general loans, Haus Lending covers up to 90% of the lesser of the as-is value or purchase price and 100% of the rehab costs. For refinancing, Haus Lending covers up to 90% of the lesser of the as-is value or purchase price plus sunk costs and 100% of the rehab costs.
Our loans are designed to make financing your projects easy and efficient. With loan terms on Multifamily investment projects having term lengths of up to 24 months (with two 6-month extensions), Haus offers flexibility for your projects.
Ready to cross the bridge for your next project? We’d love to talk with you! Connect with the Haus Lending team at firstname.lastname@example.org or call us at 1-877-GO-4-HAUS to discuss your project.
Or start your application now!
*Rates advertised are the lowest offered. Actual rates and offers may vary based on approval criteria, including but not limited to borrower FICO score, previous experience, period of ownership, etc.
**Leverage advertised is the highest offered. Actual leverage and offers may vary based on approval criteria, including but not limited to borrower FICO score, previous experience, period of ownership, etc.
***At this time, we are unable to lend in Minnesota, North Dakota, South Dakota, Utah, Oregon and Vermont.
Haus Lending is an affiliate of Loan Funder LLC, which is licensed as a California Finance Lender under Department of Business Oversight License 60DBO-69051. Arizona Commercial Mortgage Banker License 1002735. Florida Mortgage Lender Servicer License MLD1778. Nevada Mortgage Company (License #5100) (Loan Funder LLC) North Carolina Loan Broker Registration Filing 315. NMLS Company ID 1804080. West Virginia State Tax Department, Account #2410-0931 (Loan Servicer LLC).
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.