Ins and Outs of Hard Money Bridge Loan: Everything You Need to Know

Are you considering financing a real estate transaction using a hard money bridge loan? If so, there is a lot that you need to know to make an informed decision about whether this type of loan is the right choice for your needs.

What is a Hard Money Bridge Loan?

A hard money bridge loan is a type of short-term loan. Typically used to bridge the gap between a current property and a future property. It is often used by real estate investors who want to purchase a property quickly and then secure long-term financing later.

The term “hard money” refers to loans that are secured by collateral, often in the form of real estate. Because the collateral provides a greater level of security for the lender, hard money loans typically have higher interest rates and fees than traditional financing options.

The “bridge” in a hard money bridge loan refers to the fact that it is designed to be used as a temporary solution. That is until long-term financing can be secured. This could be because the borrower is waiting for a property to sell. Or may be because they are working to improve their credit score or financial situation.

How do Hard Money Bridge Loans Work?

Hard money bridge loans typically have a term of six to twelve months. In some cases this can vary depending on the lender and the borrower’s needs. During this time, the borrower makes interest-only payments and pays any fees associated with the loan.

At the end of the term, the borrower is expected to pay off the entire loan balance. More often through the sale of the property they have purchased or through long-term financing. If the borrower is unable to pay off the loan, they may be able to negotiate an extension with the lender. Alternatively they could face foreclosure on the property.

Hard money bridge loans are often much faster to secure than traditional financing options. The lender focuses more on the value of the collateral than the borrower’s credit score or financial situation. However, this process can still take several weeks or even months. This depends on the lender’s requirements and the complexity of the transaction. Bridge National typically closes within 72 hrs after all the documentation is submitted and approved.

Pros and Cons of Hard Money Bridge Loans

Before deciding to use a hard money bridge loan to finance a real estate transaction, it’s important to weigh the pros and cons of this type of financing.

Pros:

– Quick Funding. Hard money bridge loans can be secured much faster than traditional financing options. This can be essential in competitive real estate markets where properties are selling quickly.
– Flexibility. Because hard money loans are often secured by real estate, the lender may be more willing to work with borrowers who have unique financial situations or who need more flexibility in their loan terms.
– Fewer Credit Requirements. Hard money loans are often based more on the value of the property being used as collateral. They disreagard borrower’s credit score or financial situation, making it easier for borrowers with lower credit scores to secure financing.

Cons:

– High Interest Rates and Fees. Hard money bridge loans typically have much higher interest rates and fees than traditional financing options. Very often in the double digits.
– Short-Term Solution. Hard money bridge loans are meant to be used as temporary solutions, until long-term financing can be secured,. The borrowers will need to have a plan in place for how to pay off the loan before applying.
– Risk of Foreclosure. If the borrower is unable to pay off the loan at the end of the loan term or secure long-term financing, they could face foreclosure on the property used as collateral.

How to Qualify for a Hard Money Bridge Loan

Qualifying for a hard money bridge loan is typically easier than qualifying for traditional financing options, but borrowers will still need to meet certain requirements.

1. Property Value. Because hard money loans are secured by collateral, the value of the property being used will be one of the primary factors that the lender considers. The property will need to be appraised to determine its value. The lender will typically only lend up to a certain percentage of this value.

2. Equity. The borrower will need to have a certain amount of equity in the property being used as collateral. This means that they will need to have already paid off a significant portion of the property’s mortgage or have enough cash for a down payment.

3. Income. While hard money loans are often more flexible than traditional financing options, the lender will still need to ensure that the borrower has the income to make the interest-only payments throughout the loan term.

4. Exit Strategy. The borrower will need to have a clear plan for how they will pay off the loan at the end of the term. This could be through the sale of the property, refinancing with a traditional lender, or using other funds.

Finding a Hard Money Bridge Loan Lender

Once you have decided that a hard money bridge loan is the right choice for your needs, it’s important to find a reputable lender who can provide you with the financing you need.

1. Research Online: Start by researching hard money bridge loan lenders online. Look for lenders who have good reviews and a reputation for providing reliable financing.

2. Ask for Referrals. If you have friends or colleagues in the real estate industry, ask them if they have any recommendations for hard money bridge loan lenders.

3. Attend Real Estate Events. Attend local real estate events and networking groups and be sure to introduce yourself to lenders who are in attendance.

4. Check Credentials. Make sure that any lender you are considering is licensed and in good standing with the appropriate state and federal regulatory agencies.

Conclusion

Hard money bridge loans can be a valuable tool for real estate investors who need quick funding and more flexibility than traditional financing options can provide. However, it’s important to carefully consider the pros and cons of this type of loan and make sure that you have a clear plan for paying it off before applying. By working with a reputable lender and doing your due diligence, you can secure the financing you need to make your real estate investment dreams a reality.