Bridge loans and construction loans both are short-term lending options for borrowers who need funds fast.
While they are often viewed as the same type of loan because they usually are both funded against the value of an existing property, they are structured for very different purposes.
Bridge loans are used during periods of transition, such as a borrower waiting for an existing property to sell, while construction loans are used to cover all the costs of building or remodeling a new home, business, or investment property.
Let’s take a look at the differences between a bridge loan vs. construction loan, including when to use one over the other.
What is the difference between a construction loan and a bridge loan?
Bridge loans and construction loans are popular loan types for investors and developers, but they are becoming more popular among consumers in the hard money lending sphere.
These types of loans are generally much harder to qualify for when it comes to traditional lenders such as banks, but with hard money, or private money, lenders, these loans are an everyday occurrence.
Basically, these loans help cover the costs of a purchase or construction project, and when the sale or build is over, the borrower will acquire another type of financing or sell the property.
Let’s dig into how each of these loan types works, and what they are typically used for.
Construction loans are a type of short-term loan that provide homebuyers, builders, investors, or business owners with the funds to cover all the costs to build, including:
- Empty plot of land, semi-built, or completely built home
- Building plans
Construction loans are short-term because they are only used throughout the building process, and once the build is completed, the borrower can get a traditional mortgage for long-term financing or sell the property.
What’s your loan scenario?
Construction loans are more difficult to qualify for with a bank or other financial institution because these lenders must follow strict requirements.
This type of loan is considered higher risk because of all the moving pieces involved in the process — especially during periods of widespread supply or labor shortages.
While bridge loans might be used to purchase a plot of land for future construction or to cover rezoning or design costs, they usually aren’t structured to fund any construction costs.
Instead, bridge loans are used to “bridge the gap” while the borrower is waiting to secure permanent financing.
Often, bridge loans are used to cover the gap between the sale of one property and purchase of another.
They can be used for either a full purchase of a property or just the down payment, and are repaid as soon as the borrower secures financing via another sale or another type of loan.
When to use a construction loan instead of a bridge loan
Construction loans are perfect for new builds or renovation projects.
This includes those who are trying to build a new home, business, or investment property, as well as those who want to renovate or flip an existing property.
Once the new construction or renovation is completed, the borrower can then either sell the property and pay off the loan with the funds, or get a new long-term loan.
The main difference between a construction loan and bridge loan is what the funds will be used for.
Bridge loans are more helpful for purchasing a new property while you wait for an existing property to sell, while construction loans are structured for construction projects.
Let’s dig into the specifics on when to use a bridge loan rather than a construction loan.
When to use a bridge loan instead of a construction loan
Bridge loans can be used for many types of projects and purposes.
They offer borrowers the flexibility to move forward on time-sensitive deals without needing to pay all cash or have permanent financing established before it’s ready.
Here are some examples of how a borrower may choose to use a bridge loan:
- To make a contingency-free offer on a property that isn’t dependent on another property selling first
- To make a 20% down payment to avoid private mortgage insurance (PMI)
- To continue using or living in a property until they close on the new property
- To use funds for business expenses
- To purchase a new investment property immediately without having to wait for permanent financing
The greatest benefit to a bridge loan is the speed and flexibility. They are designed to help borrowers make quick, necessary decisions when they are unable to come up with the funds immediately on their own.
Hard money lenders are the perfect lender for bridge loans because they understand the unique needs of the borrowers that require them.
The real estate market isn’t always ready to offer the perfect property to a borrower right when they need it. Instead, borrowers are at the mercy of whatever is available.
To help investors, business owners, and homeowners have the flexibility they need to secure the right deals as they become available, hard money lenders can fulfill this need.
How to get a bridge loan or construction loan with a hard money lender
If you need a hard money bridge loan or construction loan, the Marquee Funding Group team can help.
We are a team of experienced real estate investors and loan originators that make deals based on common sense and the overall merits of the deal.
If you’re unsure whether a bridge loan or construction loan is right for you, call us and tell us about your deal so we can help you determine how it should be structured.
How our construction loans work
Our construction loans are for homebuyers, builders, contractors, or investors who want to build a new home, business, or investment property.
We offer broad and flexible lending requirements to provide funding quickly and simply. We can provide funding in as fast as seven to 10 days, with same-day approvals.
How our bridge loans work
Our bridge loans are especially helpful for buyers who need to close a purchase prior to selling a departing residence.
Marquee Funding Group can lend up to 70% of the combined value of any two, three, or more properties while keeping existing conventional loans in place, and can take any position on the departing residence to take first on the new purchase.
By using both properties as collateral for one loan, we can offer borrowers a short-term loan to purchase their new residence, move in, and sell the departing residence.
Then, the borrower can either pay off the loan in full or reduce the principal balance of the loan to 70% or less of the value of the newly acquired property for us to release the lien from the borrower’s departing residence.
We look forward to helping you with any and all real estate projects for many successful deals to come.
Photo by David McBee