Bridge Loan
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A bridge loan is similar to a hard money loan. The lending criteria are generally based more on real estate property value than on the credit profile of the applicant. The documentation is usually lower, while the appraisal standards are emphasized.
The term "bridge loan" indicates it will bridge the borrower to the next transaction. It is a shorter term loan that will be used for interim financing until the following occurs:
- The property is sold
- The property is refinanced with a traditional lender.
- The borrowers credit and or financial picture improves
- The property is improved or completed
- A business has resumed or improved, or changed in a specific way allowing for permanent commercial mortgage financing to occur.
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[edit] Risk
Bridge financing is riskier in terms of the borrowers credit history, or in terms of the properties readiness for marketing. The higher risk is taken by investors for a higher yield.
[edit] Costs
Bridge loan interest rates are usually 12-15%. Terms are usually 1-3 years. Points or lender fees are usually 2-4. Therefore borrowers usually seek to repay a bridge loan as soon as possible. Pre-Payment penalties may apply if a bridge lender seeks a specific yield and the borrower pays the loan off earlier.
[edit] Types Of Lenders
Bridge Loans may be given by Funding Companies, Traditional Banks, or Commercial Bank and Credit Companies. The terms may be riskier to consumers or businesses as they usually require specific performance or repayment in a very short time. It is important to understand the risks prior to taking a bridge loan.
The assets to secure the loan may include the property itself, addional assets at the premisis such as equipment, receivables, or contracts, and or additional property owned by the borrower in the form of a blanket lien. Borrowers should be careful in reading and understanding the release clauses in any blanket liens.
[edit] Loan To Values
The Loan amounts given on a bridge loan generally do not exceed 65% of the properties appraised value. Before accepting a pre-commitment from a bridge lender, be certain the appraisal has been completed or reviewed and supports the loan amount sought.
[edit] Offsetting The Expense of A Bridge Loan
The typical bridge loan is expensive in comparison with traditional bank financing. Selling a commercial property prior to the completion of renovations or the obtaining of various legal permits such as a certificate of occupancy or a building permit; or in a hurry or soft real estate market can result in the loss of return on investment (ROI). Sometimes the cost of a bridge loan is negligable in comparison to a quick sale.
Therefore if a bridge loan is taken, steps should be taken to manage the bridge financing expenses.
[edit] Steps to Managing or Reducing Bridge Loan Cost
1)First and foremost - compare loan programs among multiple mortgage companies. 2)Utilize MAI appraisers when possible to appraise the property. That will increase the chance of the appraisal being accepted by additional bridge loan lenders if needed. 3)Be sure to take additional cash out if possible on a bridge loan to subsidize the increased cost. This will offset any cash flow problems on the property, making it more likely the mortgage and it's verifiable history will not be damamged. Good credit is key to getting a good rate on permanent financing. 4)Before getting involved with a bridge lender, get an estimated quote on up-front fees. Some mortgage companies charge high up front fees which may be non-refundable. If you must pay a "due diligence" fee ask for an written itemization of how the fees will be used, including refund of overages. If the lender will not give you a written estimate, do not pay it. If it simply states "due dilligence" or application fee, you could end up rejected for the loan, without an appraisal on the property and without recourse. Shop for low due diligence fees. 5)Compare fees of four basic items when applying for a bridge loan. a) appraisal b) environmental c) underwriting and or application d) legal fees to the closing attorney for review of title, and preparation of mortgage and note. Additional fees may include a feasability study when the loan is for a large commercial construction or development project. If this is the case be sure it is done by a well know company, to be used with other lenders, in the event the loan is not granted.
