A bridge loan is similar to a hard money loan. The lending criteria are generally based more on property value than on the credit profile of the applicant. The documentation is usually lower, while the appraisal standards are emphasized. A hard money loan is a specific type of financing in which a borrower receives funds based on the value of a specific parcel of commercial real estate. ...
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 financing to occur.
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.
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.
Types Of Lenders
Bridge Loans may be given by Funding Companies, Traditional Banks, or Commercial 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.
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.