What Is a Bridge Loan?
A bridge loan is when an individual or a corporation uses the equity in their current property to take out a short-term loan to finance the purchase of a new property. The loan is temporary because the borrower’s intent is to get permanent financing from a bank. The short-term loan serves as a means of getting cash up front; in the meantime, the borrower tries to find a bank that will cover the purchase of the new property. Other terms used for bridge loan are gap financing, swing loan, or interim financing. A bridge loan is set to last for six months, but sometimes it can lag for about twelve months or one year. The majority of swing loans offer interest rates two percent higher than the fixed rate. Points and closing costs are extremely high.
Who Needs Bridge Loans?
Corporations or individuals who are looking to upgrade from a much smaller property to something bigger obtain Bridge Loans. Sometimes companies do equity financing but they do not have the funds readily available to cover the costs; therefore, they secure a swing loan.
Individuals applying for interim loans do not have their property on the market yet. They have made up their minds at the last minute that they want to buy a property of their liking, but they do not have the cash for the down payment on the property. Sometimes it takes too long for the sale of the property to go through, so the quickest way to find cash is to get a bridge loan.
How to Get Bridge Loans
Commercial Loan Direct offers bridge loans. Here is the link to their website: https://www.commercialloandirect.com/bridge-loans.html. They provide loans to families, retail, industrial, office, self- storage, hotels and motels, assisted living-congregate, and most commercial properties. They do not extend loans for the purchase of outlet malls and lands. Commercial Loan Direct will work with a borrower to secure the loan quickly. They also offer permanent financing when the terms of the swing loan are up.
Commercial Loan Direct offers three types of bridge loans:
• Small Apartment Bridge Loans: Property type is an apartment. The loan ranges from $1.5 to $5 million. The advance rate is up to 90 percent loan to cost (LTC), which includes the approved soft costs. The term of the loan is twelve months, and the interest is amortization only. A one percent exit fee gets waived until there is refinance with a Fannie Mae program. The borrower gets two to three months extension for .25 percent each. Prepayment is open.
• Mid to Large Apartment Bridge Loans: Property type is an apartment. The loan ranges from $3 to $30 million. Maximum LTV is 80 percent. The term of the loan is up to three years, and the interest is amortization only. The application fee or deposits are $5,000 per property with a non-refundable processing fee. In addition, there is $15,000 to $20,000 per property escrow deposit. The deposit is used to cover costs of various fees such as appraisal, environmental reports, travel, and due diligence. • Commercial Bridge Loans: Property type is industrial/warehouse, medical/health care, mixed-use, office, retail, and self-storage. The loan is $3 million minimum and 8 million minimum west coasts. There is no loan maximum. The maximum LTV is 90 percent as is and 80 percent at the exit. The term of the loan is one to three years, and the interest is amortization only. Origination and exit fees are to be determined. There is a monthly deposit required for replacement reserves. Prepayment is permitted. Subordinate financing includes a mezzanine debt that gets provided by the lender or an approved 3rd party lender. The need for the small apartment loan is to bring stability to an apartment complex so that it may qualify to refinance with a low-interest loan such as Fannie Mae or FHA Loan.The mid to large apartment loan is set up for multifamily owners who do not meet the requirements for low-interest loans with Fannie Mae or FHA. The family will get additional time to meet the needs until they qualify for such loans.A commercial bridge loan is for companies that are rebranding or enhancing themselves for temporary financing to get a preliminary HUD loan or a seller financing.
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Bridge Loan Terms
The terms of a bridge loan vary. One option of the loan term is to set up the loan, using it to pay off the existing loan already on the property. Whatever is left over after payment is made is applied to the down payment for the new property. There is no monthly payment for the bridge loan. However, the borrower will be paying a monthly mortgage for the new property. When the older property gets sold, the proceeds get used to pay off the bridge loan and any associated interests. The borrower can also obtain a second loan on top of the already existing loan and use the second loan as a down payment on the new property. The mortgage on the old property still has to get paid. Plus, the borrower will be paying a monthly payment for the second loan on the new property. This type of loan option could increase the borrower’s budget; therefore, it is wise to have enough money to make payments upwards to one year.
Bridge Loan Requirements
One of the demands of a bridge loan is for the borrower to have enough equity (up to 75 percent) on his or her property to get the loan. The borrower also has to have the means to repay the loan. The borrower’s credit is not a factor. The property gets used as collateral. If the borrower is unable to finish paying off the bridge loan, he or she may have to sell the property or seek long-term financing to pay off the loan.