A Basic Primer on Commercial, Short-Term Funding, Known as Bridge Loans
Bridge loan refers to the intended length and purpose of a loan: bridge loans are loans intended to be used for a short period time between the initial requirement for funds and a permanent, usually less costly, financial solution. Bridge loans collateralized by real estate are also known as hard money loans. The term hard money refers to money that is lent based on the value of real estate. By their nature, hard money loans are a commonly used as bridge loans.
Characteristics of a Bridge Loan
Hard money bridge loans carry higher costs and shorter terms than traditional bank mortgages and are used for specific business purposes. On the positive side, bridge Loans collateralized by real estate are also characterized by their ability to be completed and funded in a very short period of time and with relatively little paperwork and preparation efforts.
Uses of Bridge Loans
Bridge loans are needed when an immediate need arises, such as:
• Real estate purchases – Bridge loans are excellent resources for the purchase of real estate that requires a very short close timeframe. For example, an excellent purchase price on real estate is available, but obtaining it requires closing within a very short period of time – such as when the real estate is in danger of foreclosure, a “bidding war” makes a fast closing an advantage, the seller requires instant cash but appropriate long term funding will take time, etc.
• Retrieving real estate from foreclosure
• Business loans – Bridge loans collateralized with real estate can provide operating capital for businesses in as little as two weeks.
Hard Money Bridge Loan Lenders
There about a dozen or two major direct hard money lenders in the US. Smaller private investors may also provide lending for bridge loans. They tend to serve a specific locale or region and can be difficult to identify and verify. Almost all the advertisements for hard money or bridge loans – or for that matter, any type of non-bank generated business funding – direct you to brokers, not direct lenders. Many websites carry claims that the company is both a direct bridge loan lender and a broker. Truth be told, they will almost always be serving in the broker capacity, not as a direct bridge loan lender.
Direct (Bridge Loan) Lender
A direct bridge loan lender is not a broker. This is the company that actually writes the check and funds the loan. There are several ways that direct bridge loan lenders are funded (see below), but the important thing is that when you bring your loan request to them, they do not in turn ‘float’ your loan among direct lenders around the country in an effort to get your loan funded. Rather, brokers come to direct lenders to get loans funded.
The term institutionally funded means that you working with a direct bridge loan funding company who already has the money to fund the loan in their possession. Many direct lenders are funded by investors. These financially qualified individuals invest in bridge loans on a per-piece basis. When you or your broker contacts the lender, your paperwork is then ‘translated’ by the bridge loan officers in that company into a prospectus for their investors who then decide whether they want “in”. Once sufficient funds have been accrued, your loan is funded. This can take just a few hours or weeks to accomplish.
An institutionally funded direct bridge loan lender is funded by banks, retirement funds, and/or other such institutions. They may have one or more funding sources, but the funds are already available and at their disposal to fund bridge loans based on the criteria set forth. Since an institutionally funded bridge loan lender does not need to turn to individual investors for each loan, your loan can fund, depending on whether all your other criteria are order, in a week or two!
Working With a Broker
Although it may be less expensive to work with a direct bridge loan lender, it may not be expedient. Like a good real estate broker, knowledgeable bridge loan brokers may be valuable to you. When selecting a broker, ask for references from people and companies s/he has already worked with. Ask about commission – the compensation you will pay them for their services. An honest broker will tell you that their commission ranges from 1 – 4 or 5% (the points you pay), depending on whether they share your project with other brokers. This is not an unreasonable compensation for the work they may perform. A knowledgeable broker will know the direct lenders that handle your kind of project. Remember, each direct bridge loan lending company sets its own criteria. They will help you understand the documentation you will need to provide and review your package to be sure that your loan will progress smoothly.
Hard Money Bridge Loan Criteria
Bridge loan criteria varies from one lender to another. The more ‘flexible’ the bridge loan lender is about the terms, LTV (loan to value), financial qualifications, etc., the higher the risk to the bridge loan lender and therefore the higher the rates you will pay. If you have a loan that is a near bank deal, which means a loan your local bank almost said “Yes” to, but it didn’t match their qualifications for one reason or another – or the bank simply couldn’t fund your loan quickly enough to suit your needs, then you should work with a company that specializes in that kind of loan and charges suitably lower rates than most hard money lenders. At 11% + 3pts, Avatar Financial Group of Seattle, WA – an institutionally funded direct hard money bridge loan lender – is currently charging the lowest rates and points in the market.
Hard Money Bridge Loan Rates
Hard money bridge loan rates are currently running anywhere from 11% + 4pts to as much as 15% + 6-7 points for very high risk projects funded through brokerage houses. Terms range from a few months to 3 or more years, again depending on the nature of the project and criteria of the direct lender.