Our Most Frequently Asked Questions
Also known as interim financing, gap financing or swing loans, bridge loans “bridge the gap” during times when financing is needed but is not yet available. Both corporations and individuals use bridge loans, and lenders can customize these loans for many different situations.
Yes. An “interest reserve” account is permitted but not required. Anticipated interest for the construction period becomes part of the loan amount. In this case, the borrowers does not get a monthly bill for interest (single close construction loans are interest only during the construction period). As with a contingency item, “interest reserves” only make sense if there is “room in the deal”, and the borrowers are not already at the maximum allowable “loan-to-value” ratio, or at the maximum loan amount for which they can qualify. “Interest reserve” accounts are particularly useful when the borrowers are already making a house payment on their current residence.
In the days when there were many different construction lending options, some lenders allowed this. At this point in time, it can severely limit your construction loan options if you do more than push around some dirt, do site improvements like utilities and retaining walls, or do anything more than a slab foundation. Another possible problem with starting the build “out of pocket” is that when you are applying for a construction loan, your reserves have been depleted, and your file is not as strong.
Yes. This “rehab” construction loan can be a refinance on the home in which you live, or an acquisition rehab loan used to acquire a property and provide the funds for rehab/addition.
Use the time between accepting a lender’s offer and receiving the commitment to your advantage by tackling as many obstacles as possible:
- Once you have accepted the offer, order the title searches.
- Find out the lender’s requirements for the ALTA survey (this process could take up to 4-6 weeks, so do not sleep on the process.
- Make sure you have a long-term sense of what you will do with the property.
All professionals will say to move as many things into the “completed” list from the “to do” list. Some processes are very time consuming and should be immediately addressed.
Suggestions:
- Do not focus on the absolute bottom when choosing an interest rate. Focus on the monthly/annual payment being in your range.
- Stick with one broker. Do not work with multiple brokers.
- Address any issues (tax escrows, lender’s calculation method, timing, etc.) before you make your initial deposit.
- When it is time to refinance, consider using a different lender or at least find out what they can do for you. The nature of the industry is not static, so it is always good practice to see what others have to offer from time to time.
Although rare, bridge loans sometimes pop up in the real estate industry. If a buyer has a lag between the purchase of one property and the sale of another property, he may turn to a bridge loan. Typically, lenders only offer real estate bridge loans to borrowers with excellent credit ratings and low debt-to-income ratios. Bridge loans roll the mortgages of two houses together, giving the buyer flexibility as he waits for his old house to sell. However, in most cases, lenders only offer real estate bridge loans worth 70% of the combined value of the two properties, meaning the borrower must have significant home equity in the original property or ample cash savings on hand.
The property owner borrows against real estate they already own and pulls out equity with the bridge loan. The proceeds from the bridge loan financing are then used to purchase a new property. Once the new property is secured, the original property is sold so the bridge loan can be paid off.
Businesses turn to bridge loans when they are waiting for long-term financing and need money to cover expenses in the interim. For example, imagine a company is doing a round of equity financing expected to close in six months. It may opt to use a bridge loan to provide working capital to cover its payroll, rent, utilities, inventory costs and other expenses until the round of funding goes through.
Bridge loan financing is a straightforward process when compared to obtaining a financing from a conventional lender such as a bank or credit union. Simply contact a bridge loan lender and complete their application process. The bridge lender will require information about the borrower and the subject property. They will then analyze this information and confirm the value of the property. The bridge loan lender will then determine how much they can lend and what loan terms are available for the borrower. The loan should be able to be funded within a week.
Usually, residential mortgages take about 45 days to close while the more involved commercial process takes around 60 days from beginning to end.
You can have as many as three, and as few as one. If you purchase the land at the same time you close a construction loan, and that construction loan is a “single close” construction loan, you can get by with just one set of closing costs, and one escrow. Three sets of closing costs would be incurred if you: 1) purchase the lot first, either paying cash or by getting a lot loan, 2) you obtain an interim construction loan when you have plans drawn and a builder lined up, and 3) you then obtain a “take out” loan to provide the permanent financing.
Usually, the magical number is 20% minimum equity in the property. This relates to a loan to value that is no higher than 80%. There are some exceptions that apply (two properties can be cross-collateralized).
How much you can borrower is based on two sets of criteria. There will be an amount for which you can qualify using full income and asset documentation and a maximum 45% debt ratio. The maximum loan amount will also be limited to 80% (to $1M loan amount) of the lesser of two numbers representing the value of the home to be built. One of those values is based on what the property would be worth in today’s amrket, if finished already as planned. The other number is a cost number based on the current value of the property plus new construction costs. Above $1M loan amount we can do 75% to $1.5M, 70% to $2M, and 60% to $3M.
Yes, debt service coverage is one of the key factors contributing to whether a commercial loan is approved
There is probably no reason to pay off your lot loan prior to the construction loan funding. If you have a lot loan, the new construction loan will pay off that lot loan just like any refinance would. The lot and the new improvements constitute only one piece of real estate, and the lot loan has to be paid off so the construction lender ends up in first lien position. If you pay the lot loan off prior to applying for a construction loan, you may be handcuffing yourself by putting too much cash into the deal. Construction loans are almost always “no cash” out loans, so it may not be possible to get this cash back on acceptable financing terms until one year after the home is complete. You are often better off having cash on hand during construction to handle upgrades and changes, especially if you are doing a loan without a contingency. In some cases, depending on your loan amount, acceptable loan-to-value percentage, and how much cash or equity you have in the deal, the lot may need to be free and clear to meet these criteria, but there is no overriding guideline that the lot needs to be free and clear in all cases.
Bridge loans typically have a faster application, approval and funding process than traditional loans. However, in exchange for the convenience, these loans tend to have relatively short terms, high interest rates and large origination fees. Generally, borrowers accept these terms because they require fast, convenient access to funds. They are willing to pay high interest rates because they know the loan is short term and plan to pay it off with low-interest, long-term financing quickly. Additionally, most bridge loans do not have repayment penalties.
A bridge loan is a short-term loan that “bridges the gap” between other types of long-term financing. Bridge financing is secured by real estate and have higher interest rates than conventional loans due to the higher risk associated with these loans. They are designed for investors and borrowers who are involved in real estate projects or transactions such as hard money rehabs, making improvements on land, and purchasing short sales or foreclosures. Residential bridge loans and commercial bridge loans are available to property owners who wish to borrower against the equity in their property.
A contingency is a line item in your cost breakdown that does not have a specific element of your build associated with it. If, during the course of construction, you decide you want some additional work done, or you decide you want to upgrade your materials (from granite tile to a slab of granite for example), you can used the money in your contingency item to do this. Without a contingency, you would have to pay “out of pocket” for these changes, since the loan amount on a construction loan cannot be increased during construction. A contingency is generally a good idea if there is room enough in your appraisal or total cost such that you are not already at the maximum loan to value percentage allowed at your loan amount. Naturally, you also have to be able to qualify for the higher loan amount necessitated by the inclusion of a contingency. You only pay interest on the amount borrowed, so you are not charged interest on unused contingency funds. By virtue of raising your loan amount, the inclusion of a contingency will slightly increase your points and some of your title and escrow fees.
A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short term, up to one year, with relatively high interest rates and are usually backed by some form of collateral such as real estate or inventory.
A residential mortgage only applies to residential property (no greater than four units per building). A commercial mortgage is utilized to secure financing for a larger spectrum of properties. A residential loan process is standardized by established guidelines, but the commercial loan varies depending on individual lenders.
All lenders will want to see:
- Three years of individual and business tax returns
- Statements that detail improvements or expenses incurred by the property
- A current rent roll of any apartment building
- Personal financial statements for all partners
If you have found a lot, and you wish to use one of our low rate “single close” construction loans to acquire that lot, you need to have a long enough “close of escrow” written into the purchase contract on the lot so that you can obtain plans and select a builder in that time period. A construction loan can only close with architectural plans, a signed contract, and a cost breakdown with a builder based on those plans. From a practical standpoint, if you enter into a contract to purchase a lot, and you haven’t yet begun the process of developing plans with an architect, you’re probably going to have to obtain a lot loan or pay cash for that lot. The situation where it is easiest to use a “single close” construction loan to purchase the lot is when the lot is owned by the builder, and the builder has architectural plans for that lot that suit you.
Bridge financing should be utilized when the borrower needs capital quickly and only for a short amount of time (approximately 12 months or less). The borrower must also have real property to use as collateral to borrow against or have a large enough down payment (35% or more) to use towards a purchase if they are acquiring a new property with the proceeds from the bridge loan financing.
A broker can aid you in understanding the transient nature of the mortgage market. The broker’s fee will be more than made up in the insight they can provide in steering you away from mistakes. Since they work with mortgages on a regular basis, they will be able to offer their expertise and better be able to explain the numbers.
Most commercial loans do have a “pre-pay penalty.” This penalty is instilled if a loan is paid in full or prior to the outlined terms. Commercial loans carry a prepayment penalty for four of the first five years.
