Why Investors Rely on Bridge Loans
Bridge loans are rapidly gaining popularity among investors. When investors are purchasing another investment, they can help fund the down payment for an interim project by selling their current project with bridge loans financing. Similar to a home equity loan, this type of loan is less expensive and offers more benefits.
Bridge loans are simply temporary loans that offer interim funds between the sales price of a new investment and the investors’ new down payment on a mortgage, assuming the first investment has not sold. The bridge loan ties to the first investment, which means that when the first investment sells, the bridge loan is paid off.
Most direct lenders do not have specific set guidelines for minimum credit scores or debt-to-income ratios for funding bridge loans. Underwriters simply use common sense approaches and hard money lenders are better able to qualify investors for these type of short-term loans.
The most common reasons bridge loans receive high approval rates are the following:
• Most investors already have a first mortgage on their first investment.
• The investor will most likely close on the second investment for selling the first investment.
• This type of investment is short-term and the investor anticipates owning two investments for a brief period.
Conforming government loans may have more restrictions and can prohibit investors from obtaining debt-to-income ratios that exceed more than 50-percent. Rates generally vary and are more difficult for investors than homeowners to obtain. This is why many investors find themselves turning to hard money lenders in today’s lending economy.
A significant reason investors need to use bridge loans is that they cannot afford to have a finished project sitting without working on a new project. Investors employ contractors and sub-contractors that require work to help our volatile economy regain footing. It is more cost effective for investors to have an immediate second or third investment project lined up to allow potential revenues to increase.
There are other options to bridge loans, such as stocks, assets and even 401(k) or retirement accounts. However, investors should always speak to accountants or financial advisors before embarking on these risky ventures. Bridge loans are designed for multi-investments that require immediate funding and are less risky in healthy real estate markets than in years’ past.