With its relaxing beaches and stunning mountain ranges, the West Coast is one of today’s hottest locations for real estate investors. Entering the market, however, is inherently expensive. Hard money lenders in California are there for those who need capital to get started and, for these budding capitalists, a bridge loan is typically used. Understanding this financial instrument and how to obtain one will work to any burgeoning real estate entrepreneur’s advantage.
The Basics of Bridge Loans
Bridge loans are short-term cash infusions used to satisfy immediate expenses before you secure longer-term financing. Because residential bridge loan lenders assume a greater risk than most, these loans have high interest rates, sometimes even greater than those attached to subprime loans. Their advantage is speed, an essential factor when competing to purchase a house.
To determine the cost of a real estate bridge loan, take the value of the new home and deduct the total of the mortgage plus the deposit. Apply the rate of the loan to the difference, and there is your amount.
These loans are typically expected to be repaid within a year or sooner. Flippers often do this with the profit gained from the sale and then use the surplus to acquire their next property.
The Approval Process for Bridge Loans
Bridge loan applications typically receive validation on the same day you complete the paperwork. Funds are usually accessible within three to five days. This is because hard money loan lenders focused on real estate are interested in a residence’s value rather than the borrower’s credit. Compare this with backing provided by conventional lending institutions, which may take up to a month or longer to appear. As long as the dwelling being purchased has sufficient equity, rapid confirmation is likely.
The Benefits of Bridge Loans
Even if you fail to pay on time, bridge loan lenders are unlikely to bother you. The reason is that the lender assumes ownership of the property when borrowers fall into default.
These loans are also highly negotiable. Lenders can tweak a payment schedule, for instance, to fit any borrower’s situation. With the right negotiating skills, savvy resource seekers can obtain more favorable terms than those that are initially offered.
The Drawbacks of Bridge Loans
Because the property itself is the sole protection against the lender’s investment, hard money loans have low loan-to-value ratios. Whereas regular mortgages have LTVs of 80%, bridge loans go no higher than 70% and can be as little as 50%. Also, regulatory oversight and compliance rules have the potential to cause complications.
The Many Uses of Bridge Loans
Bridge loans are useful in many circumstances. A property developer might require funding before obtaining a permit. A homeowner whose original property could not be sold until after the new home’s closing can use one of these loans to make this transition possible. Even if you lack the desire to become an estate tycoon, you may find value in this style of advance.
Bridge loans allow novice real estate investors to begin their careers, even if they lack established credit. Despite unfavorable terms, their quickness and flexibility offer aspiring property moguls a financial foothold.