Bridge Loans

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Bridge Loans

Bridge Loans Explained

Bridge loans are short-term loans that are intended to bridge the gap until a borrower can realize a "cash friendly" situation and can pay off their short term bridge loan. Bridge loans are typically taken out for anywhere from a few weeks to several years and often carry high loan rates. A bridge loan may be used to purchase real estate, pay off commercial project debt, for commercial operating expenses or to retrieve real estate from foreclosure.

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Bridge loans typically carry high interest rates and up front points than bank loans. They are made through a private lender who can supply the loan very quickly, thereby satisfying the borrowers primary need -- cash now. Because of this, as well as the riskier loan scenario, private bridge loan lenders are justified in charging higher loan rates and points. Terms of a bridge loan can vary widely. They may be structured to completely pay off a project's existing debt, while others pile the new debt on top of the old.

Let's say a borrower goes to a hard money lender for a construction loan because of their low fico score and bad credit. However, the borrower has 50% equity in the property and wants to get a second loan to build a new home on the property. Traditional loans will almost always pass because of the fico cut off and bad credit of the borrower. Also, conventional loans often have problems with properties that derive a substantial portion of their value from the land rather than the house. That's why they are often referred to as construction loans or bridge loans.. "If a developer has spent $50 million on a project but runs out of money three months before he is ready to start selling units, he has to acquire a bridge loan for 90 days to get him over the hump. As long as the development is well thought out and has real market value, the developer stands to make a lot of money -- even with the money he has to pay on the bridge loan.


 









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