Are you an independent borrower or full-fledged business looking into bridging loans?
Right now, the bridge loan market is surging. It’s a fast and easy option that can help you in a crisis.
In this article, we’ll be defining what a bridge loan is and how it can help. As with all things, it comes with a comprehensive list of pros and cons for you to weigh for yourself.
What is a Bridging Loan?
A bridge loan is used in commercial and residential investment lending. It’s a short-term loan and matures between 1-3 years.
This type of loan maturity tends to be much shorter than traditional ones funded by life insurance companies. Instead, bridge loans are funded by the private capital of hard money lenders.
Traditional loans amortize up to a 30 year period. Alternatively, bridge loans are funded with interest payments. The monthly payment is less of a burden.
One of the more common uses of a bridge loan is during the move from an old home to a new dwelling. There are two ways the loan can be structured.
Pay Loan Through Sale Proceeds
A bridge loan doesn’t always require monthly payments. The interest is instead added to your overall loan balance.
This is an easier method if you cannot afford two mortgages at once. Keep in mind, bridge loans are still expensive in themselves.
The second method is similar to a home equity loan. Without replacing your existing mortgage, you take a smaller bridge loan that covers the downpayment on the new property.
Once the old property is sold, you pay off the old mortgage plus the bridge loan from the proceeds. It tends to be a more affordable option, but you have to make payments on both properties at the same time.
If your credit score is keeping you from purchasing a new home, check out our guide to getting a mortgage with bad credit.
If the Home Fails to Sell
These loans were created to be paid off fast with normal terms. If you can’t sell your home in time, you may be allowed an extension.
In the event that you don’t get the extension, the lender may foreclose.
The primary benefit of a bridge loan is that it’s short-term. Other loan options come with longer expenditures; they’re designed to lock you into payments for a long time.
In most cases, the longer the loan lasts, the more the borrower suffers. It only makes it more difficult to pay it off. Penalty fees rise and financial problems snowball.
Bridge loans are designed to be repaid in full. It grants you the ability to choose repayment options. You can pay the loan before or after financing is secured.
If you make all the payments on time, your credit rating will soar. You’ll qualify for better loans in future situations.
Consider that a bridge loan’s biggest benefit is also the main drawback. It’s intended to be paid back fast; your payments will be high.
If you have enough money, this won’t be an issue. If you don’t, you will have difficulty paying it back.
Due to the short-term nature of the loan, lenders may not be flexible with late payments. They’ll charge huge fees and penalties. It will only get harder to pay back.
As the borrower, you can get around that by choosing to pay it once financing is secured.
However, for every month you fail to repay it, interest rises. Your actual payment could end up much larger than it was originally.
Another drawback is its heavy reliance on permanent financing availability. It’s not always guaranteed and the borrower will be on their own.
Companies can use bridge loans as well. It helps them cover shortcomings in capital.
The most common types for businesses include operating capital and mortgage bridge loans.
For example, if your company’s office space loan is due before finding a replacement loan, a bridge loan can pay it off.
Once a replacement is acquired, it can pay off the bridge loan.
In most cases, companies find it’s easier to qualify for bridge loans when compared to others.
Lenders understand that these loans provide gap financing and are not long-term solutions.
Because of this, companies are willing to pay higher interest rates or higher origination fees.
Lenders customize these bridge loans to suit various business needs.
As an added benefit, a business can pay off a bridge loan at any time without penalty. This sets it apart from most commercial loans.
Bridge loans come with zero prepayment penalty, making them a flexible option.
Just like with the independent borrower for housing, bridge loans are an expensive option for businesses as well. The faster a company can access and qualify for money, the higher the financing costs they will pay.
Bridge loans carry much higher financing charges when compared to traditional, long-term loans. This is why most businesses use bridge loans only as a short-term solution.
Do You Qualify?
In most situations, qualifying for a bridging loan is easier than a mortgage loan. However, you must be able to prove that you can cover the costs.
FICO rules tend to be stringent when applying for long-term loans. Alternatively, they’re more relaxed for short-term funding.
Before diving in, find out the amount you will need. It may still be an estimate, but try to get as concrete of a number as possible.
Give yourself the freedom to look at your options. Don’t settle for the first bank that offers. Fees vary, but you should focus more on the individual points they charge on.
Appraise your assets. Qualification relies on collateral.
Apply for a Bridge Loan and Breathe Easy
Once you’ve determined that you have the appropriate assets and can afford the monthly payment, you’re ready for the loan. You can relax knowing that this short-term solution can be crucial in helping you through a quick crisis.
For more information on bridge loans – or even to apply for one – check out AdMainBridging. It’s quick and easy to apply. Their four-step process will get you on your way to a new bridge loan.
For all other inquiries, feel free to contact Florida Independent.