Real Estate Investing & Bridge Loans: The Benefits
A bridge loan is a short-term financing option that has become increasingly popular in recent years, as it “bridges the gap” until other, more favorable, financing is available. Often referred to as a swing loan, or gap financing, bridge loans enable a borrower to purchase a new property before permanent financing is obtained or another property is sold. A real estate participant also may seek a real estate bridge loan to “take out” current financing on a property before long-term financing is available. This type of loan is typically secured by property currently owned by the borrower and has shorter durations, higher interest rates, and more origination points than a traditional real estate loan.
Because of the robust real estate market in the Washington, DC metropolitan area, you can find many hard money lenders offering bridge loans in Maryland, Virginia, and DC.
Here are some key benefits of choosing a bridge loan for your next real estate investment:
1. Short-term financial support. Bridge loans are valuable if you are looking to access funds quickly and for a short period of time (6–12 months). Short term loans don’t work with a bank’s business model. If you have an investment property that you know will sell but will take a few months to offload, a bridge loan is a great solution to free up cash to purchase a can’t-miss fix and flip deal.
2. Easier qualification. Banks have a list of criteria that determines who they will and won’t provide a loan to. Recent foreclosures, short sales, bankruptcies, poor credit or insufficient employment history are just some of the factors that can prevent a borrower from receiving much-needed financing. Hard money lenders are likely to overlook some, or all, of these issues if the borrower has enough down payment for the deal.
3. Quick approval. A major benefit of a bridge loan is fast funding — which can make or break a fix and flip deal. Banks can take months and extensive documentation to approve a loan, whereas hard money lenders can approve and fund a bridge loan within days.
4. Flexibility. Unlike conventional bank loans, specifications for bridge loans are not set in stone. Banks are extremely risk-averse and will not fund a property that they feel is uninhabitable and doesn’t fall within their strict lending criteria, as many fix and flip properties do. Issues that can disqualify properties from traditional financing can include problems with the foundation, electrical or plumbing systems. Due to the more flexible standards of hard money lenders, real estate investors are able to acquire properties that would not get funded by traditional lending institutions.
Bottom line: The “stars do not always align” as new acquisition opportunities present themselves before existing projects can be sold. Bridge loans are a good financing option for borrowers looking to access money quickly for a short-term real estate opportunity. The fast and simpler access to capital can help nab the property in the midst of competitive bids and lays the foundation for a successful and profitable flip.