How to Use a Bridge Loan

When and How to Use a Bridge Loan

Bridge loans help property owners by giving them time to sell a property, make certain improvements or find a new tenant. Whether or not your business is a suitable candidate for a mortgage bridging loan depends on why you need it, how you intend to use the funds and what the likelihood is that you can pay it back in a short period of time.

Bridge Loan Mortgage Basics

Bridge loans help property owners manage a cash crunch and lenders expect these owners to pay more for the privilege. As a result, terms usually include an interest rate premium of 3% or more over the standard mortgage lending rate as well as a short term, often six months to a year, and points. On the plus side, bridge loans usually do not feature prepayment penalties, so paying sooner rather than later is advantageous for the borrower.

Once the owner finds a new tenant, completes the improvement or sells the property, the bridge loan is repaid through the new influx of funds. The owner then secures permanent financing at rates and terms much friendlier than what the original bridge loan offered. As with all loans, business owners with excellent credit and significant collateral secure the best bridge loan terms.

When to Use a Bridge Loan

Bridge loans are best suited to borrowers who have established businesses with ample finances. A commercial landlord who wishes to improve an existing vacant property and is confident that doing so will result in higher income from a future renter is a likely bridge loan candidate. Following completion of the work, the landlord secures higher rents and refinances the expensive bridge loan into a long-term loan with friendlier terms.

Borrowers with uncertain income or less-than-average credit will find securing a non-equity bridge loan much more difficult. These borrowers may find the funding they need with a hard money bridge loan lender, which will lend based on the available equity.

Securing Favorable Terms

You can secure the most favorable mortgage bridge loan terms possible by paying your current debt obligations on time and as per the agreed terms. Finally, create a business plan that is error-free and demonstrates clearly your planned use of funds.