Some lenders might talk about hard money and a bridge loan as the same – that’s okay. But it will benefit you to know the particular uses for bridge loans.
The basics of a bridge loan are that they’re used to bridge you from one project to the next. You pay the loan off when the first property sells. Using bridge loans can make your investment career smoother, faster, and more profitable.
Here are 3 ways you can use them.
1. Bridge Loans to Get from One Property to the Next
The most common use of bridge loans in the hard money space is to bridge you from one property to the next.
When you have a flipped property that’s almost complete – the work is done, it’s under contract, it’s almost sold – you might want to get started on your next project without waiting for the official close.
The problem is: How do you buy a new property without the money from selling the old one? A hard money bridge loan solves that problem.
A bridge loan allows you to use the property that’s about to be sold as collateral for a new loan for a new property. Once the first property sells, some of that money is used to pay off the bridge loan. Then you own the new property free and clear.
This way of using a bridge loan is especially useful if you have a lot of cash put into one property. You don’t have to wait to get that money back after selling to start on your next investment.
2. Bridge Loans to Cover a Down Payment on a New Property
You can use an advance of the equity on a current property as the down payment for the new property through a bridge loan.
Maybe you’re about to sell one property. And you’re able to get financing for your next one… Except you can’t cover the down payment.
In this case, you’ll probably use a bridge loan in conjunction with a hard money loan. The hard money loan covers the property cost, and the bridge loan covers the remaining down payment cost. Then that bridge loan gets paid off when you sell the old property.
3. Bridge Loans to Close Fast
Another way you could use a bridge loan is to close faster on a new property.
Maybe you plan on using more traditional financing through a bank, but the bank loan wouldn’t be ready in time. You can use a short-term bridge loan.
This loan bridges you from the closing to the refinance. A bridge lender will help you with the initial purchase. Then once your bank (or hard money) loan is completely ready – usually several weeks or a month later – that bank loan pays off the bridge loan.
Bridge Loans in the Hard Money World
Typically bridge loans are used for 3 situations in real estate investing:
- When you’re buying a new property and already have one listed for sale
- When you need to cover down payment on a new property
- When you find a great deal but your bank’s financing won’t be ready in time.
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