What Is A Bridge Loan?
What Is A Bridge Loan?
A bridge loan can mean several things, but in general, it is a short-term loan to bridge a financing gap of some kind. Once the transaction is completed the bridge loan is either paid off or refinanced conventionally. As discussed in this article a bridge loan is going to carry a higher interest rate and origination cost in comparison to a long-term conventional loan.
A few examples of bridge loans:
- A person needs to sell their existing home in order to get the money to put down on a new home they wish to purchase.
- A real estate investor has fixed up a flip property and has listed it for sale, but has also found another home they want to purchase and would like to start their next flip while the initial home is still for sale or being finished.
- A business owner needs short-term capital to bridge the gap between when income is coming in and when an expense is currently due.
- In a 1031 exchange, there is a short window (generally 60-day) in which a sale of an investment property needs to be rolled into another investment property to qualify for the tax exemption. A reverse 1031 is where the property is purchased prior to the sale of the other property, a loan to purchase such a property can sometimes be considered a bridge loan.
How can Northwest Private Lending (NWPL) help?
Examples 1 and 2
- A bridge loan can be structured in several ways, but in examples 1 and 2 NWPL we would put a lien on the property being sold and the property being purchased. When the first property is sold the proceeds of the sale or a portion of the proceeds will be used to pay off or pay down the loan. When two properties are used as collateral this is also considered a cross-collateralized loan.
- NWPL will commonly lend up to 100% of the purchase price of the new home if there is sufficient equity in the home that is for sale. NWPL would take a 1st position lien on the property being purchased and a 1st or 2nd position lien on the property being sold.
- Once the ownership of the purchased home is established the borrower can refinance the loan with a lower rate conventional mortgage.
- The business owner would need to own real estate in which the loan would be collateralized. If they do, NWPL can offer very quick access to that stored equity in the home. We would require a 1st position lien, meaning that all other liens would need to also be paid off prior to the borrower receiving any funds.
- There is commonly a 3rd party intermediator who helps with the tax preparation of this type of transaction to assure the property is purchased and documented correctly. NWPL can make the loan on the property being sold so that the funds could be used to purchase the new property.
If you’re interested in applying for a bridge loan today click here or feel free to give us a call at 503-941-5473.