What Is a Bridge Loan?
When a bridge loan serves as a “bridge” from one stage to the next stage of financing, an example:
An LLC wishes to purchase an Assisted Living / Senior Housing Facility. The property is eligible for FHA Financing, but the approval process takes nearly a year. A bridge loan would be used in the first stage of financing, in the acquisition of the Assisted Living Center. The FHA financing will refinance the bridge loan within 8-9 months.
A bridge loan is also called a hard money loan. It can be used to take advantage of an opportunity quickly or provided under other, non-conventional lending circumstances. An example:
In the case of a property acquisition, a bridge loan can allow a real estate investor to buy a property at a low price, and then resell quickly at a higher price.
The interest rates charged by a bridge loan lender are much higher than interest rates found at a bank. Most bridge loans are of a short-term nature, typically from 2 to 3 years. There are some bridge loan lenders that offer 5 year terms.
Bridge loans require more money down on a purchase than a bank loan. On commercial purchases, bridge loans are typically 65-75% of the purchase price max. But when compared with new depository requirements of banks, the down payment is nearly equivalent when comparing a bridge lender with a bank lender.
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