If you're looking for a way to finance your home purchase, you can find many options that make it a bit confusing to you which one suits you better. You can tap equity sources such as your family, friends, investors, business angels, enterprise investment schemes, and others to fund a part - say, 25 percent -  of the property price. 

As for financing the rest of the home price, you can consider taking a bridge loan. This blog post will examine how bridge loans work and why they can be a good financing option when buying a property. 

What is a Bridge Loan?

A bridge loan is a short-term financing option that a borrower can use until he or his business eliminates an existing obligation or obtains permanent financing. It’s a secured loan in which borrowers can use their real estate and other cash-flowing assets as collateral.

A bridge loan typically has a variable interest rate, and it tends to be higher than other loan options. One advantage of this financing is its short repayment plan, and it may include future funding or structuring to facilitate payment based on the repositioning of the property.

Use of Bridge Loans in Real Estate

You can use bridge loans in real estate for many purposes, including selling or renovating a property within a short period, buying a home under a tight closing timeline, or saving property from foreclosure. 

Moreover, bridge loans can be used in stabilizing the cash flow of a rental property, looking for a new tenant, or resolving issues that impact the property or low credit scores that prevent a borrower from getting financing on the property. 

The terms of bridge loans usually last up to two or three years. Borrowers can repay the loan upon the sale or refinancing of the property. 

Examples of How You Can Use a Bridge Loan in Real Estate

Let’s discuss some examples to get a clearer picture of the different uses of bridge loans in real estate.

Multi-Family Housing

You can get a bridge loan if you’re planning to renovate units of your rental property by installing new flooring, granite countertops, appliances, etc. After the renovation, you can raise the rent according to the quality of the property improvement. 

Retail Building

Buying a rental building at a discounted price, holding onto the property for a short period, and selling it. In this case, you can use a bridge loan to close on the retail property faster. 

Office Building

You can purchase an office building and lease it or sell it at a higher price. A bridge loan can be used to fund your purchase or help finance your tenants fit out their units. 

Industrial Building

If you own an industrial property, you can apply for a bridge loan to renovate the units to make them more marketable. For example, you can expand the suites or make them more flexible because that’s what tenants want nowadays.

Advantages of Bridge Loans

The number one advantage of bridge loans is flexibility. It’s an excellent option if you’re a borrower who needs short-term financing for property renovations or home purchases. You can use this loan to close on a property under a tight closing timeline.

If you manage a rental property, a bridge loan can also be used to search for new tenants. 

It’s also a non-recourse type of financing. It means the lending company can only ask for repayment of the money you borrow through the property. For simple explanation, you have no financial obligation to repay the loan because it's on the property, and the lending company can’t seek repayment even

if it happens that the property’s market value doesn’t cover the loan balance. 

Disadvantages of Bridge Loans

The catch with using bridge loans is that they can have higher interest rates compared to traditional loans. The shorter repayment periods of this type of financing can also be a downside because you’ll be charged with penalties when you’re late on your payments. 

Besides being expensive, bridge loans also rely on take-out financings, such as the property being sold. It means this loan may not always be available in the market. If there’s a market meltdown, borrowers will have a hard time applying for bridge loans because lenders will worry about loan defaults and lower returns.

Final Thoughts

Bridge loans can help to finance your real estate property purchase. But, like any other type of financing, there are upsides and downsides to this loan. Make an assessment of your financial situation and whether a bridge loan is good for you. 

Also, make sure to look for a lender that can offer lower interest rates and fees. Lastly, read stuff online about the best loans you can take for buying a real estate property because you can find many financing options out there.