Whether you’re a seasoned investor or a first-time homebuyer, you may find yourself in need of quick and flexible financing to pursue a lucrative deal or bridge the gap between selling and purchasing real estate properties.
A bridge loan can be a valuable financial tool as it can provide the funds to bridge the gap between real estate property transactions. Obtaining a bridge loan through a hard money lender secures funds quickly, often within a matter of days, which is crucial for seizing time-sensitive real estate opportunities. Additionally, it offers more flexibility in terms of eligibility and repayment terms.
Let’s find out what a bridge loan is and how real estate investors can qualify for this type of loan through HCS Equity.
Hard Money Bridge Loan Explained
A hard money bridge loan is a valuable financial tool for borrowers who find themselves in specific situations where traditional lending options aren’t feasible or fast enough to meet their needs. Namely, a bridge loan is a short-term loan that serves as “a bridge”, i.e., covers the immediate funding needs of real estate investors through the transitory time period between selling the existing property and buying a new one.
HCS Equity bridge loans are characterized by their speed, flexibility, and short-term nature, which align with the investors’ strategy of turning around properties quickly. These loans often range from 6 months to 12 months (depending on the specific scenario) and come with interest-only payments, no prepayment penalties or minimum months of interest, and a balloon payment due at maturity.
They can be a great option for borrowers with less-than-ideal credit history who may struggle to secure conventional financing. In such cases, hard money lenders such as HCS Equity are more willing to overlook credit issues and focus on the value of the property being financed.
Qualifying for a Bridge Loan from HCS Equity
When it comes to bridge financing, hard money lenders such as HCS Equity often focus on the real estate property used as collateral. So, unlike traditional lenders who rely on a borrower’s credit history, we prioritize the property’s value. In fact, we use a metric known as the Loan-to-Value (LTV) ratio to estimate the loan amount we’re willing to provide.
To calculate the LTV ratio, we divide the loan amount by the property’s appraised value. For instance, suppose that we’re considering funding a $300,000 loan secured by a property with an appraised value of $450,000. In this case, the LTV ratio would be 60%, which is $300,000 divided by $450,000.
Most hard money bridge lenders set a limit on the LTV ratio, typically around 65% to 70% of the property value. This means that we’re willing to provide a loan amount that doesn’t exceed this percentage of the property’s appraised value.
Maintaining an LTV ratio within this range provides us with a level of confidence and security. We believe that even in the unfortunate event of a loan default, the proceeds from the sale of the property through foreclosure will be sufficient to repay the loan.
It’s worth noting that LTV ratio requirements can vary based on the type of property being used as collateral. Riskier assets (like commercial real estate or land) may have lower LTV ratio limits to account for the increased risk associated with these types of properties.
Bridge Loan Examples
Let’s explore two real-life scenarios where borrowers can benefit significantly from hard money bridge loans.
Scenario #1: Fast-Paced Purchase for Long-Term Investment
A borrower is on the verge of securing a deal on a single-family home that holds great potential for long-term rental income. However, the borrower has committed to a lightning-fast 10-day closing process without an inspection or appraisal. This poses a significant challenge because traditional lenders typically require a detailed appraisal process that takes time.
Within the tight time frame, the borrower might find it almost impossible to obtain conventional financing. In this situation, a short-term hard money bridge loan allows the borrower to secure the property quickly. Once they own the property and start generating rental income, they can then pursue a traditional loan to refinance the hard money loan. This strategic approach offers a temporary solution until securing long-term financial stability and cash flow through rental income.
Scenario #2 Upgrading an Apartment Building for a Greater ROI
Let’s consider another scenario. A borrower owns a 5-unit apartment building with high potential, but it’s suffering from deferred maintenance, and two units are sitting vacant. The borrower needs to address these issues to attract higher-paying tenants and maximize rental income. However, securing conventional bank financing might not be an option due to the property’s current condition.
In this case, a hard money lender can step in and offer the borrower a 12-month bridge loan based on the property’s Loan-to-Value (LTV). This provides the borrower with the necessary funds to complete the essential repairs and renovations. Once these improvements are made and the property starts generating rental income, the borrower can then switch to conventional bank financing to repay the bridge loan.
The Final Words
Bridge loans from hard money lenders such as HCS Equity are a valuable financial instrument because they provide quick access to capital when conventional bank financing is unattainable.
We rely on the Loan-to-Value (LTV) ratio rather than the borrower’s financial situation. This makes our bridge loans an attractive option for various real estate needs, such as securing a property swiftly, addressing property renovations, or navigating a time-sensitive real estate transaction.
Contact HCS Equity today to secure a hard money bridge loan and make the most of your real estate endeavors.
