When it comes to financing options for real estate investors, many find themselves comparing these two solutions: bridge loans vs. traditional loans.
Understanding their differences is vital to determine which option is best suited for your investment needs.
In this article, we’ll explore the advantages of bridge loans, particularly those obtained from hard money lenders, and compare them to traditional loans to help you make an informed decision.
Defining bridge loans vs. traditional loans
Bridge Loans: These are short-term loans designed to “bridge” the gap (or time period) between the time you purchase a property and your ability to secure long-term financing or sell another property to fund it yourself. Bridge loans offer quick access to capital, making them ideal for time-sensitive real estate transactions.
Traditional Loans: These loans typically refer to conventional mortgages provided by banks or other financial institutions. Traditional loans have stricter qualification requirements and terms, as well as longer approval processes, but often come with lower interest rates and longer repayment terms.
What’s your loan scenario?
Key differences and appropriate scenarios
Speed and timing
Bridge loans are known for their speed, as they can be approved and funded within days or weeks. This makes them ideal for situations where quick access to capital is crucial, such as securing a property in a competitive market or taking advantage of a time-sensitive investment opportunity.
On the other hand, traditional loans often take several weeks, maybe months, to approve and fund — making them less suitable for time-sensitive transactions. However, they may be appropriate for borrowers who have more time to secure financing and prefer the stability of a long-term loan.
Flexibility and loan purpose
Bridge loans offer greater flexibility compared to traditional loans, as they can be used for various purposes, including property acquisition, renovation costs, or operational expenses during a project. This versatility allows investors to tailor their financing solutions to their unique investment strategies and goals.
Traditional loans, such as conventional mortgages, are typically limited to specific purposes like purchasing a primary residence or refinancing an existing mortgage. This makes them less adaptable to the diverse needs of real estate investors.
Bridge loans, especially those from hard money lenders, often have more lenient qualification requirements than traditional loans.
Hard money lenders focus mainly on property values and their potential for turning a profit, rather than the borrower’s credit score or DTI (debt-to-income ratio).
Lenders, like Marquee Funding Group, know that there is usually a story attributed to a borrower’s low credit scores. Whether that be because of late payments, economic downturn (like Covid-19), unknown loan on a property, etc. that has caused their scores to decrease well below the “normal” limit.
MFG is there to help investors and borrowers try to raise their credit scores by paying off the debt that has caused those scores to decrease. This benefits borrowers with less-than-perfect credit or those who need financing quickly.
In contrast, traditional loans have stricter qualification criteria, including credit scores, income verification, and debt-to-income ratios. These requirements can make it challenging for some borrowers to obtain financing through conventional means.
The benefits of bridge loans from hard money lenders
Speed and efficiency
Matching one of the fundamental benefits of bridge loans, hard money loans excel in speed and efficiency. This mirrored nature makes hard money lenders a perfect fit for bridge loans.
Marquee Funding Group excels at getting bridge loans sold and funded within a matter of weeks for the borrower and sometimes even faster depending on the situation and time needed to close the loan.
With less paperwork and faster approval processes, investors can secure funding quickly, giving them a competitive edge in the market.
Another similarity is that hard money lenders often offer their clients much more flexible loan terms and repayment options than what you would find at a traditional bank. This allows investors to create customized financing solutions that align with their unique investment strategies and goals.
Lower and more lenient requirements
Also, bridge loans from hard money lenders often have more lenient qualification requirements compared to traditional loans. This can be advantageous for investors with less-than-perfect credit or those who need financing quickly.
Due to these lenient qualification requirements, hard money lenders, like Marquee Funding Group, can close loans within one to two weeks.
Bridge loans vs. traditional loans—the pros and cons
We’ve shown how bridge loans offer numerous benefits to real estate investors. But it’s essential to compare them to the potential drawbacks of traditional loans to understand their true value.
Higher Interest Rates: Yes, bridge loans typically come with higher interest rates compared to traditional loans. However, given their short-term nature, the overall cost of borrowing may still be lower than that of a long-term loan. Having the opportunity to pay back your loan much faster than most traditional loan agreements means you pay a lot less.
Shorter Repayment Terms: Bridge loans have shorter repayment terms, which can be both a pro and a con. On one hand, this means investors can avoid being locked into long-term financial obligations that may not suit their investment plans. On the other hand, it may result in higher monthly payments.
Risk of Default: Due to their short-term nature and higher interest rates, bridge loans can carry a higher risk of default than traditional loans. However, by carefully managing risks and planning for contingencies, investors can mitigate these potential issues.
Borrower’s need to do their due diligence in making sure they have the capital to pay back the loan. If your exit strategy is sound and you plan for a short-term repayment, then the default risk should be minimal.
Bridge loans vs. traditional loans in conclusion
In many scenarios, bridge loans obtained from hard money lenders can be a superior financing option compared to traditional loans.
With their speed, flexibility, and lower requirements, bridge loans offer real estate investors the opportunity to secure properties and generate returns on their investments quickly.
By understanding the differences between bridge loans and traditional loans, you can make an informed decision about which financing solution is right for your investment needs.
If you’re interested in connecting with reputable lenders who want a true investment partner, reach out to Marquee Funding Group today. We set our own borrowing guidelines that make the most sense for us and our borrowers.
Photo by Expect Best