Do you need to borrow a large amount of money for a short amount of time? If so, a bridge loan might be just what you need. Also known as the ‘gap’ loans, bridge loans are short-term loans intended to bridge the gap between immediate funding needs and future income. Consumers can get bridge loans from private lenders, like Salt Lake City-based Actium Partners, or go to their banks.
Regardless of the source, all bridge loans have a few things in common. Yet their differences are what define them. A private bridge loan is quite a bit different from a bridge loan offered by a bank. It has different purposes. Being approved involves an entirely different process.
Private Bridge Loans
Private bridge loans are described as such because they are made by private lenders. A private lender may be a group of two or three investors who pool their money. On the other hand, some private lenders are essentially funds with assets derived from dozens of investors.
Most of the bridge loans private lenders make go to funding real estate transactions. However, some private lenders are happy to offer loans for other purposes. For example, a client might need a bridge loan to pay off an existing line of credit in order to subsequently apply for a new line of credit.
The most important characteristic of private bridge loans is that they are asset-based. In short, asset-based lending looks almost exclusively at the value of the borrower’s assets rather than things like W-2 income and credit scores. The asset being purchased acts as collateral for the loan. As long as borrowers have a strong enough asset and a solid exit plan, approval is pretty straightforward.
Finally, private bridge loans are fast. Lenders generally only need a couple of days to complete the approval and appraisal processes. It wouldn’t be unusual for a borrower to apply on a Monday and have the loan funded by Thursday or Friday.
Bridge Loans from Banks
Some retail and commercial banks provide bridge loans on a limited basis. They are almost always attached to real estate transactions. In a retail setting, a bank might approve a bridge loan for a customer who is trying to buy a new home even as their existing home is on the market.
Just like private bridge loans, bank bridge loans are short-term instruments. They typically last from 3 to 12 months. They also carry higher interest rates and fees. As for how much the customer can borrow, therein lies another significant difference between bank and private loans.
A private lender generally applies its loan-to-value (LTV) ratio to the asset being acquired. Banks offering bridge loans will look at both properties. Let’s say you have a bank with an 80% LTV. It will offer a loan of up 80% of the combined value of both houses.
The idea is to provide enough money to pay off the current mortgage and fund the new home purchase. There is an expectation that the customer will sell his existing home within a reasonable amount of time. Assuming he does, he uses the proceeds to pay off as much of the bridge loan as possible. The remaining amount gets rolled into a traditional mortgage on the new home.
There are other differences, including the fact that banks still look at income, credit rates and scores, and other things private lenders are not so concerned about. Yet in both cases, bridge loans are short-term loans that can make it easier to acquire real estate that is otherwise out of reach.
