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Why Use Bridge Financing? | How To Qualify For A Bridge Loan



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typically what happens is when a sellers

are selling their home they have a ton

of equity built up usually they're

either gonna use that equity as a down

payment or they want to use that equity

in addition to the cash that they're

gonna put down as a down payment you

know it's important to take into

consideration that this isn't a

long-term solution this is a very short

term just to bridge the gap between a

sale and a purchase qualification so you

might be wondering hey how do I qualify

for this loan

that's a great question any

developmental project there's all these

things that you can run into that are

unforeseen costs such as right now we're

seeing some of the cold videos that's

gonna extend out your cost and you're

gonna be paying on money even though

people aren't actually working so that

could be an issue that you run into what

happens if you want to buy a property

but you don't have the money and you're

waiting to sell another property well

unfortunately a lot of new investors

will just let that deal fall apart but

there's actually solutions out there for

us investors in today's video I sit down

with Josh Aaron from finlay mortgages

and they break down exactly what the

deal is when it comes to bridge

financing I'm really excited for this

video because bridge financing is

something that again I think only

sophisticated investor stumble upon

through through experience rather than

really learning about when they first

get started

so I really appreciate Josh and Aaron

taking the time to break down on my

youtube channel exactly what the deal is

and how bridge financing works and let's

dive into that video right now all right

guys Aaron Leacock here Josh been late

friendly a mortgage team and today we're

gonna be talking to you about

residential commercial bridge loans so

to start out we're gonna take a look at

what a residential bridge loan looks

like it's a short-term loan usually

offered by the big sinks banks and the

maximum amount of the loan that you can

be able to take out is usually around

$200,000 for a majority of 120 days now

why would you need one of these bridge

loans on their residential side the most

popular case is that you're selling your

home outside of your purchase date so

typically what happens is when a sellers

are selling their home they have a ton

of equity built up usually they're

either gonna use that equity as a down

payment or they want to use that equity

in addition to the cash that they're

gonna put down as a down payment and

that's gonna help to reduce your loan of

value and also help to reduce the

cost associated with your monthly

payment so we're gonna walk you through

a quick example of what a purchase and

sell it's gonna look like in terms of a

bridge loan so the closing date on the

home that you're gonna purchase let's

say it's thirty five days out but you're

selling your home and the closing date

is 90 days out so there's about a 55-day

gap between your closing of your new

purchase and the selling of your little

residents now for this example we're

gonna use a purchase price of five

hundred thousand dollars and that's it's

gonna be your primary residence you're

able to get away with that five percent

down but like I said you've already got

some equity built up and you want to

reduce the loan of value and some of the

cost so that five percent deposit that's

coming out of your cash we're gonna use

twenty five thousand dollars and let's

just say that you have about three

hundred thousand dollars of equity and

you want to use you know one hundred and

twenty five thousand dollars from that

sale to add on so what does that look

like your total downpayment it's gonna

be a hundred and fifty thousand dollars

then we're gonna - that from the deposit

you've already put down so that's about

twenty-five thousand out of your pocket

that's gonna leave us with one hundred

and twenty five thousand dollar bridge

loan you're gonna get that loan from the

bank and they're gonna give you that to

help extend the time from your purchase

to the sale of your property which then

you can use the equity to pay out that

loan qualification so you might be

wondering hey how do I qualify for this

loan that's a great question so you

don't specifically qualify for the

bridge loan you qualify for the purchase

of your home so I mean if you're gonna

qualify for the purchase of your home

then the bank is obviously lending or

giving you this opportunity as a service

for a little bit of a fee to be able to

move forward with your purchase

now fees it's often similar fees to

opening like a line of credit it's not

crazy expensive but there are some fees

incurred when when trying to do this and

try to transition from you know an early

purchase to a late sale so what's gonna

usually happen is it's gonna be a

nominal flat fee few hundred bucks maybe

two to five hundred dollars depending on

the lender and they're gonna have like a

percentage rate usually around prime

plus two or prime plus three you know

it's important to take into

consideration that this isn't a long

term solution this is a very short term

just to bridge the gap between a sale

and a purchase okay so the second type

of situation we're gonna see a bridge

loan and there's a ton of different ways

that you're gonna see it on the

commercial side

and we'll go over those in a second here

but let's just take a look at what the

general terms you're gonna see on that

bridge from the commercial side so the

transaction size it really isn't limited

to like a cap in the actual evaluation

it's gonna be limited to your actual

loan of value on whatever property

you're getting that bridge loan for yes

so for a term I mean this bridge

basically means like again filling a gap

a short-term gap so these specific type

of financers aren't looking for an

extended long term they're looking for a

very short term but it's usually

predefined so you know it can be upwards

of a week for really private money to

primarily we see about a one-year term

for two-year terms develop depending on

the development project yeah it's

usually based on the as is value as well

so keep that in mind when you're getting

an appraisal done it's not going to be

as the as complete value but the key

point here is that it gets your project

further along to the valuation that you

want to start getting more permanent and

more long-term financing off of per-say

such as construction financing and

that's one of the things we're going to

talk about so the loan the value of the

actual bridge loan itself not the

acquisition value it's somewhere between

65 to 85 percent and there's gonna be a

ton of different factors that come in to

determine this such as what the project

is the size the loan value and where

it's located as well too and the

interest rates like I said it's gonna

vary differently but on the lower and

less complex projects you're gonna see

interest coming in starting at 6.5

percent and the big thing that we want

to focus on with the bridge loan is what

is your exit strategy and the majority

of time it is either a refinance or a

selling off of the property

why would somebody use this that's a

great question so when people take a

look at bridge financing especially

short-term bridge financing in the

development space it can be very

expensive because it's the first year of

lending or the first seconds here of

lending in a stage of development

process so this is gonna be an expensive

staging of of lending but somebody would

use this specifically maybe for site

servicing costs to change zoning on

property to be able to

maybe a dilapidated rental property and

bring it up to where it has to be for

the after renovation value there are

many different reasons why somebody

would take on the short-term bridge

financing but again as Erin said finding

that exit strategy whether that's

changing the zoning or finishing the

renovation getting that refinance that's

the most important part of bridge

financing the other time you're gonna

see these bridge loans use is

development financing so this could be

anywhere from you know building a 10 to

12 unit duplex all the way to a large

multi tower condominium in any

developmental project there's all these

things that you can run into that

unforeseen costs you know that could be

such as right now we're seeing some of

the cold vide shoes where construction

gets put on on you know hold that's

gonna extend out your cost and you're

gonna be paying on money even though

people aren't actually working so that

could be I'm an issue that you run into

lot servicing paving out that lot

parking lots such things like that

demolition if you're purchasing land

that already has previously existing

structures on there you're obviously not

gonna want those on their watch during

the construction so you're gonna have to

incur some demolition costs on there if

you are developing something such as a

condo you know there's gonna be units

are gonna have to be sold preemptively

you're gonna need a sales center to be

able to go through and process those

sales and then some other things as well

too is just first type of construction

to get that project moving along and get

things moving to be able to be more

appeasing to larger construction

financing or better financing options

for a more longer-term yeah I think it's

also important to realize that the loan

value on these types of loans are

specific to the project or the type of

property you're looking to to get the

loan against so for example if you're

looking for a piece of raw land the

majority of these private lenders out

there are these short term bridge

financing companies are looking at

around 50 percent loan to value of that

piece of property to extend you for that

year as obviously you move down the

development stage to loan the value

changes and depending on if it's a cash

flowing property or if it's a

pre-existing property it's gonna be a

handful of different factors that are

going to go into how much money that'll

lenders

be able to extend to you for that

project yeah and another important thing

to remember too is you know we do deal

with creative financing solutions and

sometimes when these bridge loans do

come from a private lender you know we

can actually build some of those

interest costs into the loan itself and

then that helps with feasibility as well

too

so keep that in mind as well like I said

creative solutions for everybody again

so when you're sitting down with your

mortgage broker sit down and talk about

the strategy that you're looking to

implement talk about the exit strategy

and then the broker is very easily able

to find the solution to move you towards

that strategy so having a clearly

defined strategy have a plan have have

steps that you're going to take with

your mortgage broker with your Power

Group to be able to move forward with

that project all right guys so that's

pretty it for the bridge loans they come

in various shapes and sizes so the best

thing you know if you find yourself in a

position where you might need a

short-term loan reach out to us let's

take a look at what your project is

where you're at and what your exit

strategy is and we're able to you know

find you and create you a solution based

off of your application thanks guys

thanks again to Josh and Aaron from

finlay mortgages really appreciate them

breaking down for us exactly how bridge

financing works I hope it brought some

clarity to everyone but if you've got

more questions about financing whether

it be related to bridge financing or

other types of financing you know what

to do jump in that comment section down

below hit us up with your questions and

we'll answer them on the next YouTube

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