If you’re thinking about repositioning your debt or purchasing a new property to add to your portfolio, it’s important to consider all of your finance options. Bridge loans are a great choice for people who want to access capital quickly in order to expand or alter their property business. Bridge loans are a fast and efficient way to raise funds between a short-term cash requirement and long-term loan.
Benefits of a bridge loan
Whether you need short-term financing as a way to acquire a property quickly or a mechanism to reposition existing debt across multiple investment properties, bridge loans offer a number of advantages over traditional loans.
Timing and speed
When opportunity knocks in the property market, you need to act fast. First and foremost, bridge loans are much quicker than conventional loans, with gap agreements designed to meet your immediate needs as an investor. Bridge loans allow you to purchase or refinance property on a short-term basis, with most agreements lasting from a few months up to a couple of years.
There are four types of bridge loans that differ in terms of their time frame: open bridge loans, closed bridge loans, first charge bridge loans, and second charge bridge loans. These loans normally have a faster application, approval, and funding process than conventional loans. Whether you’re looking for a fix-and-flip project or a new rental opportunity, bridge loans allow you to act quickly and take advantage of current market conditions.
Timing and execution is everything when it comes to real estate, especially in heated markets, auction sales, and anywhere else where there’s likely to be a significant differential between capital and market value. For example, a bridge loan can help you to close on a bargain property before you’re able to meet the stringent requirements of a long-term mortgage.
Eligibility and access
When you need to act quickly, lenders need to find a new way to assess loan eligibility. Unlike standard mortgage contracts, there are no exact specifications for a bridge loan, with financial and credit requirements likely to differ between borrowers, properties, and lenders. Individual credit scores are not as significant in determining bridge loan eligibility, which gives more flexibility to borrowers who are looking to finance multiple property deals. With a bridge loan, the loan is typically secured by the property about to be purchased.
There are certain qualifications that lenders will still look for, however, including previous experience with similar real estate projects, individual income and net worth, and sufficient cash reserves. The exact requirements will depend on the lender in question, with significant differences likely to exist between lenders and locations. For example, people with multiple unfinished properties or substantial property debt may be able to get a bridge loan based on the success of previous property projects.
Flexibility and control
Taking out a bridge loan for a fix-and-flip project or rental property provides you with flexibility and control over your investment. Rather than waiting for a conventional mortgage or dealing with the complexities of borrowing from friends or family, a bridge loan can give you an unprecedented level of control over your investment. While you still need to prove adequate income in order to repay your debt, repayment schedules are likely to be more flexible and you may be able to use an interest reserve if you have sufficient equity in the property.
At the end of the day, a bridge loan allows you to leverage large projects and take advantage of opportunities that may not be open to you any other way. This kind of flexibility and control is worth its weight in gold, with investors able to set their own timelines, budgets, and development schedules based on the specific needs of the project in question. Bridge loans often include flexible repayment schedules, interest-only payments until maturation, and no prepayment penalties.