Bridge loans represent a fairly common financing option among commercial real estate investors. Although bridge loans were pretty normal in residential real estate during the 1990s, this is no longer the case. They are almost unheard of among mortgage lenders these days.
So what’s the deal? Why do real estate investors utilize bridge loans so often? For that, we turn to Actium Partners out of Salt Lake City, UT. Actium Partners specializes in hard money and bridge loans for real estate. They say there are three primary reasons investors come to them for bridge loans:
1. Fewer Borrowing Requirements
Actium and its competitors operate on a business model that allows them to approve loans with fewer requirements. The best way to understand this is to compare Actium’s business model against that of a retail bank.
The hard money lender’s paperwork requirements are significantly fewer. Likewise for income verification. Actium makes its decisions based primarily on the value of the asset being acquired. Therefore, they don’t require that borrowers furnish a mountain of paperwork or verify every little detail of their past and current finances.
By contrast, banks leave no stone unturned. They look into past business dealings. They check the borrower’s credit rating and history. They require pay stubs, tax records, and any other documents capable of proving the borrower’s income.
2. Shorter Funding Time
The second benefit of a commercial bridge loan is a direct result of the first: shorter funding time. Because hard money lenders do not require a whole lot from borrowers, it doesn’t take them weeks to review and approve an application. It doesn’t take months to close a loan. Hard money lenders can wrap things up in a matter of days or weeks.
The other side of that coin are retail banks and their long, drawn-out approval and underwriting processes. If you have ever bought a home with a mortgage, you know the deal. The entire process can take months. It is no different for real estate investors who seek conventional loans.
3. Easier Access to Conventional Financing
This final benefit may not make sense to you if you’re not in real estate. Here it is – easier access to conventional financing. Though the statement sounds contradictory, it’s not.
By its nature, a bridge loan is a short-term loan intended to bridge the gap between an immediate financial need and a future source of cash. A real estate investor may not be able to convince his bank to write a loan for his latest acquisition. Why? Because the bank sees the transaction as too risky.
If that investor is able to obtain a bridge loan, he can acquire the property and begin generating revenue from it. A few months down the road he can approach his bank to apply for conventional financing. The bank is now more comfortable because the investor owns the property, and the property is generating income.
Why Seek Conventional Financing
It’s in the investor’s best interests to obtain conventional financing to pay off a bridge loan. Conventional loans have better rates and terms. So by using a bridge loan to obtain the property and then getting a conventional loan to pay it off, the investor gets the best of both worlds.
This example perfectly illustrates why bridge loans are so valuable to real estate investors who need to move quickly to acquire the most attractive properties. Banks cannot move quickly enough. However, private lenders can. They can offer quick bridge loans so that investors can acquire new properties even as they work on more conventional financing. A bridge loan covers that gap between the two.