Bridge Loan V/S Conventional Loan
If you’re planning to get a loan, you might have heard about the terms bridge loan and conventional loan. What’s the difference between the two?
A bridge loan is a short-term financing option which, like its name, is used to bridge the gap until you can secure long-term financing. These loans are meant for those who deal in real estate projects and can be availed in the form of residential or commercial bridge loans.
Banks seldom offer bridge loans, which are also referred to as swing loans or gap financing. They are a viable option for situations where financing is required for a period of 12 months or less. Borrowers can make use of this form of financing for either acquisition or refinancing purposes.
These short-term financing options have higher interest rates as they are considered to be riskier than traditional mortgages. In comparison, borrowers of conventional loans benefit from lower interest rates. Conventional loan takers are given the option to repay the amount with a fixed interest rate over a few decades or to opt for an adjustable-rate mortgage, where the interest rate fluctuates according to the market rate.
In comparison to conventional mortgages, swing loans have a low loan to value ratio of 70%-75% – which serves to defend against defaulting borrowers. On the other hand, conventional loans, which are issued by private companies, fail to guarantee protection of the lender – making them a riskier option. This is why conventional loans call for stricter credit and income requirements.
Lenders of bridge loans generally focus on aspects like property value and property equity, while also analyzing borrowers on their credit and liquidity. Once the lender has confirmed the property value, he will establish the amount and the terms of the loan – which is usually funded within a week.
Those who own property can take out a bridge loan against the equity of their existing asset to purchase new property. The older property can be used as collateral for the purchase. Following the purchase of the new property, the older asset is sold or other long-term financing is put into place to clear the bridge loan.
Hard money bridge loans are the right choice for those who own multiple properties, and are a viable alternative for those who cannot receive financing due to bad credit. Conventional loans are not viable for those who cannot make a substantial down payment. For a conventional loan, the lender takes the final call on the costs associated with the loan – making it a risky option for the borrower as well.