A bridge loan can be a way to get short-term funding to pay down a new property without waiting for conventional financing approval. Since they are short-term loans for only a few years, the interest rates are usually much higher. Some lenders may even require collateral. While this can be a good idea in some cases, it may be better to pursue another method of financing.
Our Titan Funding team invites you to learn more about these loans. We will provide a brief overview of when one can be a good idea and conclude with situations with better choices than a bridge loan.
What Is a Bridge Loan?
As mentioned, a bridge loan is a short-term financing option funded much faster than a conventional mortgage. This allows you to move quicker on a property or use a residential bridge loan to buy a new home without waiting to sell your current home. A bridge loan is also known as interim financing, gap financing, or a swing loan. Terms of a bridge loan can and will vary but tend to fall within six months to three years. The length usually depends on the situation and the individual lender.
Closing costs are also a part of a bridge loan, just like a conventional loan. While the rates vary, they trend much higher than conventional mortgage rates. Are you looking to sell your current home but want to purchase the new one without waiting? If you do, the bridge loan lender will most likely use your existing home to secure the bridge loan.
The amount you can borrow in this scenario will depend on the equity in your current home. Once your home sells, you can use the proceeds to pay off the bridge loan balance. Using a bridge loan in this fashion allows you to make an offer on a new home without including a contingency on the sale of your home. This will make the offer more lucrative.
Investors will also use bridge loans to get funding earlier. This enables them to close on a deal before it goes away, get going sooner on renovations, or earn income from the property. In this situation, you may not need collateral, as the lender wants proof of profitability in the new venture.
When Are the Wrong Times To Seek a Bridge Loan?
There are some situations in which the bridge loan is a great idea. But, there are also some scenarios where there may be better solutions than procuring a bridge loan, which may lead to issues in the future.
Real Estate Investments
One such case is if you’re an investor and you’re looking at a real estate investment or project that is high-risk. While being confident in your abilities to get property and make it profitable is essential for success, being over-confident can lead to undertaking a project that does not pan out.
Bridge loans have higher interest rates and terms with rapid turnaround times. If you cannot become profitable enough to pay off the bridge loan by the time it is due, the loan will do more harm than good. This is because you’ll have to absorb the costs and extra payments yourself.
Low Median Credit Score
A circumstance that’s the wrong time to seek a bridge loan is when you have a median credit score. Most bridge loan lenders have minimum credit requirements, just as most lenders do. Typically, the magic number for a minimum credit score is 680. Do you fall somewhere south of that? If so, the odds are good that lenders won’t approve your bridge loan application. A co-signer or guarantor may help, but approval might still be problematic. Communicate openly and honestly with your lender and ensure you understand every loan aspect.
Extensive Volatile Debt
Another scenario that may be the wrong time to seek a bridge loan is when you already have extensive volatile debt. Volatile debt would be already having loans on projects or properties that are at risk. Do you already have debt against an investment that is not likely to be profitable any time soon? If you do, taking on more debt of any kind, especially debt that can be volatile, like a bridge loan, may put you in further jeopardy.
Using a bridge loan to pay off long-term debt can be a wise financial decision in the right circumstances. In the wrong cases, it compounds the issue putting you in further financial peril.
The above two scenarios are usually in your control. However, some circumstances indicating the wrong time to seek a bridge loan are not. Savvy real estate investors know that you must approach relationships with lenders with caution. Newer investors may not be as wary. That said, ask upfront about any fees and penalties for any loan agreement.
Excessive Hidden Fees
Hidden fees are prevalent in many areas, not only with bridge loans. But with the built-in risks of bridge loans, you need to know all actual and potential costs. Hidden or poorly disclosed fees may be the difference between a successful investment and a financial failure. If your lender is evasive or not fully transparent with any aspect of your loan, you should at least seek a different lender. Or even an alternate financing option.
Contact Titan Funding Today
When you’re ready to get started, reach out to the team at Titan Funding. Our experts can discuss bridge loan options, answer any questions, and help you decide if a bridge loan is best for your situation. We can also discuss other investment options through Titan Funding to better serve your needs and determine the best action. Are you ready to secure funding for your next project? If so, knowing when and how to use or not use a bridge loan is vital information.
Call our Titan Funding team Monday through Friday from 9 a.m. to 6 p.m. at 855-929-1134. You can also complete our secure online form 24 hours a day, seven days a week. We’re conveniently located at 2701 NW Boca Raton Boulevard, Suite 105, in Boca Raton, Florida.
Mortgage by Investment Zen is licensed with CC BY 2.0