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Is a Bridge Loan a Good Idea?

Bridge loan document with coffee and notebook

Flipping real estate, especially if you’re a relatively new investor, may entail purchasing a new property before the sale of a previous investment is complete. This may mean that funds critical to a new purchase are tied up but will soon become available. In these cases, some real estate investors opt to take out bridge loans. Bridge loans can be a convenient tool to facilitate a real estate purchase, but they can also entail some risk. Learn more about bridge loans below, and contact an experienced San Diego real estate lawyer for help if something goes awry in your purchase or sale.

What is a Bridge Loan?

The term “bridge loan” is used to describe a short-term loan that’s used to allow a purchase to move forward while waiting for a contingency to occur. In many cases, bridge loans are used to pay off the balance of a buyer’s existing mortgage so that they can purchase a new home before the sale of their old home is final. This allows the buyer to have cash on hand to put toward a down payment on the new home without yet having sold the old one. Bridge loans are especially helpful in competitive sellers’ markets.

Pros and Cons

While bridge loans can facilitate a purchase that otherwise couldn’t have gone forward, there are disadvantages to taking out a bridge loan. Bridge loans tend to come with a high interest rate, since the loans are short-term and involve more risk for lenders than do more traditional loans. Few lenders offer bridge loans, and those which do require that borrowers be extremely strong candidates before approving a bridge loan application.

The biggest risk of all is that something may go wrong in the borrower’s sale of the older property. Should that sale fall through, a bridge loan borrower could be left in a very challenging position of having three outstanding loans without the capital from the sale to pay them off—the original mortgage, the bridge loan, and the mortgage on the new home. It is for this reason that, before approving a candidate for a bridge loan, lenders will often seek to ensure that the purchase of the older property is highly likely to be completed. A seasoned California real estate investment attorney can help you determine whether a bridge loan could be a helpful and prudent tool for you to use when making a real estate investment.

For seasoned, effective, and professional legal help with a complex California real estate transaction, contact the San Diego offices of Jon Alan Enochs for a confidential consultation at 619-421-3956.

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