Bridge the Gap: What is a Bridge Loan and Why Do I Need One?

One of the best places to invest your money is in real estate. With all the real estate trends available, flipping properties may be the best option for you.

Flipping homes is a real estate investment strategy that comprises purchasing low-cost homes in need of repair, renovating them, and then reselling them for a profit. House flipping can be a profitable business, but it also carries a high level of risk, particularly for beginners.

If you want to buy real estate to fix and flip but don’t have the funds, you’ll need to secure a bank loan to help you get started. Fixing up and reselling houses can be a rewarding business enterprise. You will, however, require a consistent stream of projects.

You may want to consider a fix-and-flip bridge loan to assist you in accomplishing this. What is a bridge loan, and is it right for you? Here is a bridge loan guide to help you understand some things before applying.

Flipping Homes Has Its Costs

While buying, renovating, and reselling properties might be profitable, flipping a property costs more than buying a home you wish to live in. Not only will you require finances to purchase the property, but you will also need remodeling funds and the ability to handle utilities, property taxes, and homeowners’ coverage from the time the transaction closes until you sell the property.

When deciding to start flipping houses, it can be difficult if you don’t have any money to invest. It’s not the early 2000s anymore when anyone could get a loan with no money down. Even if you get approved for a loan, and have a down payment, borrowing to finance a flip will cost you more than borrowing to purchase a primary house.

This is because lenders consider flipping to be a riskier investment. Furthermore, many institutions will not lend to rookie flippers. They’ll want to see that you’ve sold at least one property for a profit in the past. Some will work with a novice flipper but could demand more in fees and interest.

What Is a Bridge Loan?

While finishing their current job, many flippers will keep an eye on future opportunities. You could be looking into a specific location or even examining properties. You might like to think about a bridging loan in this situation.

Gap financing, interim financing, or a swing loan, are all terms that might be used to describe bridge loans. The financing is arranged in this case to allow you to acquire the second property while you complete remodeling and selling the first.

You can use the proceeds from the first home to pay the bridge loan off, then take any profits and begin work on the next house. As a result, these loans are attractive to investors, particularly those who manage larger portfolios.

If there is a gap between the buying of one home and the selling of another, a bridge loan may be used. Borrowers with great credit scores and low debt-to-income levels are typically the only ones who qualify for real estate bridge loans.

How Do You Know if a Fix and Flip Bridge Loan Is Right for You?

There are a few things you should think about before applying for bridge financing. To begin with, you must have a well-defined exit strategy for these loans to operate.

The first property will almost always be renovated and sold. You have until the conclusion of the bridge loan period to finish this project. As a result, you must have a well-defined timeline. When you have a defined and workable timeline, you will not have to concern yourself about project delays.

The next issue you’ll have to consider is how much of the original property you own. Most flippers own the property they are flipping. If you want to pursue getting a bridging loan, you must have this information available.

There may also be instances when the situation becomes more complicated. A third party, for example, might own the property. In this situation, you may need extra information to determine whether you are eligible to apply for a bridge loan.

Finally, you must determine how quickly you need the funds. If you go through the banks, expect to wait a few weeks or even months for your money to appear in your account. This may result in you missing out on an opportunity.

You will be able to acquire the money faster if you work with an alternative finance firm or a private lender. In 48 hours, you’ll find out if you have been accepted. Your money can be in your account in about seven days following your approval. This is ideal for investors because it increases your chances of receiving the property you want.

What Are the Conditions for a Fix and Flip Bridge Loan?

There are a few requirements that need to be met before applying for this kind of loan. To begin, you’ll need prior real estate flipping experience. You’ll need to have worked on several properties or own some properties. To verify this, you will need to supply some documentation.

You must also verify that you are recognized by the appropriate state authorities. You will not, however, need to submit any employment documents or tax returns.

You must also ensure that you are completing the correct paperwork. What kind of information you’ll need to provide depends on the sort of loan you’re looking for. The lender may ask you to present bank statements, for example. You may also need to provide a FICO score.

The minimal FICO score required for approval will vary depending on the loan type. In general, the application process through an alternative financing group will be less rigorous than that required by a bank. You’ll be able to receive loans faster if you fill out fewer applications.

What Are the Benefits of a Bridge Loan?

First, as a house flipper, it provides you with additional financial security. You can safeguard your assets if something goes wrong. Of course, the private lender can prevent this by establishing certain requirements that you must meet.

Your bridge loan will also increase your purchasing power. Rather than utilizing your assets and income to buy the house and pay for all of the repairs and upgrades, your bridge loan will take care of a large portion of the cost.

The ability to generate a quick profit is one of the reasons why flipping houses in real estate is so popular. A house flip can yield substantial returns if done correctly.

People can often earn more than their yearly salary from flipping a single home. In many cases, people might see these profits in a relatively short amount of time. They can make these gains in as little as a few months.

What Types of Properties Can You Finance With a Bridge Loan?

Bridge loans are available for single-family and multifamily homes. These must not, however, be owner-occupied. In other words, you can’t live there.

Real estate investors use bridge loans to buy properties that fit their investment criteria. They are often undervalued and need rehabilitation.

The real estate investor may refinance the bridging loan as soon as possible to get a lower interest rate and longer-term loan. A cash-out refinance is an option for real estate investors who want to adopt the BRRRR (Buy, Repair, Rent, Refinance, Repeat) approach.

Types of Loans for Flipping

The type of financing you can get will be determined by how much money you have available. For new construction loans, for example, you might be able to receive up to $5 million. You could be able to receive $10 million in finance if you need a multifamily bridging loan.

The amount of bridging money you can get will usually be determined by the value of the initial property. There are several methods for calculating this.
You can begin by requesting an After Repair Value loan. This is a smart option for houses where you expect your upgrades to boost value.

An example of how this works is to assume you come upon a property for $150,000. You expect that you will need $50,000 worth of improvements. You plan on selling the home for $300,000 after completing the renovation.

The loan amount will be between 65 and 75% of the ARV. This could imply you’ll be able to secure a $195,000 loan. Before proceeding, the creditor will want to check your figures to ensure that your projections are accurate. Typically, this sort of financing is only suitable for properties with a profit margin of 50 to 100% when sold.

The Loan to Cost approach is the second option. These properties should still sell for a profit. However, they will lack the ARV loans’ 50 to 100 % margin. An LTC loan will pay about 75 to 80% of your expenses. Your figures will be double-checked by the lender to ensure that they are correct.

How Long Do Fix and Flip Bridge Loans Last?

The length of a bridging loan can vary. They do, however, have a somewhat limited lifespan. It can be a few months in length.

This will afford you enough time to complete and sell the old house before purchasing the new one. But, if you want to borrow for a longer duration, talk to the lender about it. Most of the time, they won’t mind adjusting the terms to make a loan that better fits your needs.

Do You Need Collateral for a Fix and Flip Bridge Loan?

Most loans will need some form of security. By creating a motivation for you to pay, you reduce the risk that the lenders will face. A bridging loan is no exception.

The collateral will, in most situations, be deducted from the estimated value of the refurbished property. You won’t have to think about collateral as long as you sell the house and pay off the loan.

What makes a bridge loan so interesting is that your collateral can also be the estimated value of the rehabbed home, which makes it a fantastic alternative for individuals who are new to the house flipping business.

What Are the Risks of a Bridging Loan?

Bridging loans can be a terrific alternative for home flippers. That does not negate the fact that they are not without risk. For starters, there will almost always be a hefty interest rate.

This will be assessed daily and charged every month. As a result, the longer it will take to sell the home and pay off the debt, the higher the price. This is especially expensive if you still owe money on your initial mortgage.

The longer the length of time it takes to sell the home, the larger these charges will grow due to compounding interest. As a result, it’s a good idea to add extra weeks to your schedule in case of delays.

Another issue you may encounter is that you will be required to sell the home by a certain date. If you don’t sell the house by the deadline, there’s usually a clause in your contract that allows the lender to step in.

This means they can require you to sell. It’s crucial to think about this possibility while selecting how long the loan will last. This is one of the most effective methods for avoiding problems.

Where to Get a Bridge Loan

What is a bridge loan? We hope this article has answered this question for you. If a bridge loan sounds right for you, but don’t know where to get one, we can help! Our knowledgeable staff will walk you through your options and assist you in selecting the best kind of financing for your needs.

We provide financing for real estate investors who want low rates and personalized, dependable lending services. Contact us, or check out our Blog section for helpful information.