Bridge loans are most often used in scenarios where investors need fast access to cash during a transition period, while traditional loans are generally used as a permanent, long-term source of financing.
The decision to take out a bridge loan vs. traditional financing comes with many considerations, including what the investor is able to qualify for and the immediate need.
In this article, we’ll discuss the factors associated with bridge loans vs. traditional financing to help investors determine the right course of action.Get Started with Park Place Finance
What is the purpose of a bridge loan?
A bridge loan is a type of short-term financing that serves as a “bridge” during a transition period.
One of the most common bridge loan scenarios is when an investor needs to purchase a property before they are able to sell one that will finance the purchase.
Bridge loans provide quick access to cash with flexible qualification requirements.
The most popular type of bridge loan for real estate investors is financed by hard money lenders.
Hard money bridge loans are more focused on the property’s asset value, rather than the borrower’s income or employment.
Investors often leverage hard money bridge loans to secure immediate financing on a great investment opportunity that isn’t likely to last long, including auction purchases or undervalued properties.
Who should use a bridge loan?
Bridge loans are perfect for real estate investors because these types of deals rely on fast closings and lender flexibility.
They are more accessible than traditional loans because they don’t require strict income and employment documentation.
Due to the nature of real estate investing — particularly for full-time investors — pay stubs, W-2s, and tax returns often aren’t a suitable option for qualification.
Instead, qualification for a bridge loan is largely based on the value of the property you need to finance.
Can traditional loans be used as bridge loans?
Traditional loans such as conventional loans generally are not suitable as bridge loans because they have long terms, strict underwriting requirements, and lengthy approval times.
While some traditional lenders such as banks may offer a bridge loan, the requirements will be more stringent than with a hard money lender due to the higher risk associated with this type of loan.
Real estate investors will sometimes refinance to a traditional loan once they have used a bridge loan to secure a long-term rental property.Get Started with Park Place Finance
What are the key differences between bridge loans and traditional financing?
Bridge loans and traditional financing serve different purposes in real estate.
Let’s take a look at the strengths and common uses of each.
Bridge loans are a short-term source of financing meant to fulfill an investor’s immediate need.
When the purpose is satisfied, the investor will repay the loan either by the sale of another property or by refinancing into a long-term loan.
Bridge loans for investors often are supplied by hard money lenders. Qualification is based on the property’s asset value, rather than the investor’s personal financial situation.
Park Place Finance’s bridge loan requirements include:
- Borrower’s bank statements and credit history
- Property appraisal
- Annual insurance information for the property
- Detailed plan for purchase and exit strategy
- Closing costs and fees
- Loan-to-value ratio (LTV) above 70-75%
- Down payment based on your equity and individual scenario
Bridge loans generally are interest-only loans, with the full amount due at the end of the loan term.
A traditional loan, such as a conventional purchase loan, is most often used to purchase a residential property.
Investors can use them to purchase a non-owner-occupied property, but because these loans are based on standardized borrower criteria, there is little flexibility with the requirements.
Traditional loans provide a long-term source of financing, which is only helpful with long-term investments. The approval process can take several weeks or months.
Borrowers can expect to see the following general requirements for a traditional loan:
- Income and employment documentation
- High credit score
- Low debt-to-income ratio (DTI)
- Private mortgage insurance (PMI) unless borrower puts down at least 20%
- Up to 10 financed properties allowed, including second homes and investment properties
- Closing costs and fees
Income and employment verification alone can make qualifying for a traditional loan difficult for investors. The limit to the amount of properties you can finance also is a major deterrent.
Hard money bridge loans have a fast, simple process from start to finish to help investors access cash quickly.
Building a relationship with a hard money lender is strongly encouraged to create a mutually beneficial partnership for years of successful deals to come.
Bridge loan vs. traditional loan: Which one is right for you?
Whether you’re a new or seasoned real estate investor, there may come a time when you’re unsure of the best source of financing for an investment.
In today’s market especially, investors have more options than ever for financing their next big project.
While traditional sources of financing have their place in the market, real estate investors can benefit significantly from building a partnership with a private money lender.
Private money lenders understand real estate investing and the challenges investors face.
Finding a lender you can trust is a crucial aspect of real estate investing.
Apply today with Park Place Finance
Every great real estate investor is backed by a reliable team of professionals.
One crucial member of this team is a private money lender—one who can offer you the following:
- Lends nationwide for maximum flexibility
- Offers competitive rates
- Knows how to close quickly and on time
- Has been in business for many years
Park Place Finance can do all of this and more.
We’re a direct hard money lender with in-house capital and have funded over $1 billion in loans since 2006.
Every borrower will have access to a dedicated account executive who will maintain open communication throughout the loan process and help you prepare for the next deal.
Park Place Finance offers bridge loans, fix-and-flip loans, construction loans, and DSCR loans to eligible borrowers.
If you’re looking for more information about the private money loan process or advice on your specific deal, send us a question or call us at 866-407-1599.
We look forward to hearing from you!