In real estate investing, it can often seem likes there’s a pit separating you from your goals. It’s tempting to try to walk away, or to close your eyes and leap, but there’s a better way. Bridge loans are one of the many financing options that are offered to help investors, developers and builders get real estate projects off the ground. With real estate values on the rise, bridge loans are now easier to get in California compared to just a few years ago.
However, many real estate buyers – including seasoned investors – are unfamiliar with how a bridge loan works and when it makes sense to use this lending solution. Our team is helping investors weigh their options by answering five of the most common questions about bridge loans.
What is a Bridge Loan?
First things first, the most important question – what exactly is a bridge loan. The Consumer Financial Protection Bureau defines bridge loans as lending options that are meant to provide short-term capital while a person or business is waiting for other sources of funding to be secured. They are essentially meant to help bridge the gap so that the borrower can hold on to real estate, continue operations or move on to a new project.
What is the Term Length for a Bridge Loan?
What’s considered short-term will vary from one lender to the next. That said, generally bridge loans are no longer than 12 months. For many lenders six months is the standard term length on bridge loans. However, Socotra Capital is among the few lenders that offer more flexibility with loan terms of up to seven years.
Why Would Someone Want to Use a Bridge Loan?
The time is takes to close transactions, secure financing, make improvements and market properties necessitates the need for bridge loans in the real estate industry. There are many instances when a bridge loan makes good sense:
- An individual is buying a home, but hasn’t sold their current property yet.
- An investor buys an apartment complex and needs funds for operation and improvements while looking for renters.
- A developer needs capital to continue building while waiting on equity financing to close.
- A buyer needs cash funds quickly to purchase a property.
- A business owner needs working capital to expand their team in order to meet the demands of a new contract.
As you can see, there are a wide variety of scenarios where bridge loan funding is viable solution, particularly when it’s certain that long-term financing or funds can be secured in the near future.
What Are the Requirements of Securing a Bridge Loan?
Each lender has a unique set of requirements for any loan that they handle. While the key requirement for many traditional loans is good credit, for bridge loans it is usually collateral. The most common form of collateral used to secure a bridge loan is equity in real property. The lender will analyze the current value of the property, loan-to-value amount and after repair value (ARV) if the loan is needed for a rehab or fix and flip property.
The lender may also require detailed information on how you plan to repay the bridge loan. This not only helps them assess the risk but can also help determine which type of bridge loan will work best for your unique circumstances. When discussing repayment of the loan it is always advisable to also ask whether there will be any prepayment penalties.
What Are the Limitations of a Bridge Loan?
The most obvious limitation with bridge loans is the length of time to pay it off. This isn’t usually a concern given that the loan is meant to provide short-term capital. But if a borrower does need more time to repay the loan they can request an extension. A lender isn’t required to make the extension, and when they do it is typically only for a few additional months.
The other limitation is the amount that can be borrowed. Lenders will only provide a maximum bridge loan amount equal to 80% of the collateral property’s value. However, for many lenders the ceiling is typically closer to 65-75%. Since this is a short-term fix while waiting for long-term funding, 65-80% is generally adequate for many borrowers.
Socotra Capital is a leading California lender that specializes in bridge loans for real estate professionals and investors. We are able to streamline the approval process to provide funds within a matter of days so you don’t have to put a project on hold or miss out on an investment opportunity.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.