For those unused to working in real estate investment, discovering bridge loans and understanding when they are the best option for a property is a very important part of the learning curve that defines the early growth of your portfolio. Some new investors are confused because they are familiar with business bridge loans, which share some features of bridge loans for real estate but not many. Both are short-term instruments designed to help you make the most of your working capital, but beyond that? They’re very different, and using a business loan doesn’t prepare you for the kind of hard money bridge loans that are common in real estate investment.
What Makes a Residential Bridge Loan?
Short-term lending designed to allow you to close on a property quickly so you can improve or resell it is generally not available from traditional lenders like banks. Instead, these loans are usually financed by firms who specialize in lending to businesses as their primary form of investment. They’re called hard money lenders sometimes, as well as private money lenders or just private lenders, and the term hard money refers to the fact that the capital provided is backed by real value. That means it is based on the value of collateral, typically the property. Most hard money loans for real estate carry the following features:
- Interest-only payments until the final payment
- Terms between six months and a year
- Fast closings and approvals
- Application criteria primarily based on equity and income
Most of the time, a hard money lender in California will be less concerned with your FICO score than with the value of the collateral, especially if you’re buying property that is under-valued because it needs a little rehabilitation. When you’re closing on a building worth much more than its asking price, you might even be able to close without a down payment. Most residential bridge loan lenders provide lending at around 70% LTV, which means you’ll need some down payment money if you’re not buying a property that’s significantly underpriced.
Cash Out Bridge Loans on Owned Properties
Sometimes, if you need to close without a down payment from your working capital, you can find lenders who provide double bridge loan services. It’s also possible, if you must, to set the situation up for yourself by working with two lenders. For the first bridge loan, you use a property you already own. This provides a cash resource you can use as the down payment for your investment property, which can then be financed with a bridge loan secured by the new purchase. This process is also a great way to raise money for improvements if you have properties with enough equity, and some advanced investors simply perform a cash-out refinance on existing long-term income properties to fund both the acquisition and improvement of new buildings, without any debt attached to the new purchases at all.
Learn More About Bridge Loan Approval
While hard money lenders don’t always require a great credit score from investors looking for real estate loans, it doesn’t hurt. Like in any other area of finance, a solid FICO score will help control the costs of the loan and speed up approval times, because it reduces the lender’s risks. Learn more about how to qualify for a bridge loan before putting together your first application to give yourself the best odds of approval on your first try.