Many borrowers simply do not understand how the bridge financing works as it was something of a foreign concept until recently. So, while applying for bridge loans, many borrowers make mistakes that could affect the final outcome of their loan application.
Bridge loan lenders are not miscreant finance sharks who are looking to take advantage of the desperate people (borrowers). The rate of interest for a short term bridge is higher than what is provided by any conventional lender. But, these finances provide money to the businesses and individuals that do not fit within the conventional lending box such as banks and other establishments.
But for these financing solutions, there are not many real estate projects with opportunities for developing and reaching their true potential. A short term bridge loan can be just the type of funding the investors require to keep their commercial investment plan running smoothly and efficiently. In this post, we will discuss about some of the common mistakes borrowers make while applying for a bridge loan and how such mistakes can be avoided.
Mistake # 1: Focusing on the interest rate
Based on their experience and knowledge of this domain, commercial loan brokers can help borrowers get the lowest interest rate on bridge loans. Apart from the low rate of interest, it is important to know that borrowers should also take into consideration the time and loan fees. Common sources of bridge finance are private companies or individuals who are interested in obtaining better returns on their investment. A borrower could miss out on good lending options by focusing too much on the rate of interest of the bridge loan, depending on the length of time they hold the loan for.
Mistake # 2: Applying for a loan without having an exit strategy
A borrower should avoid entering into a short term bridge loan without having the proper exit strategy. They should consider how many loans they are able to realistically afford and how much time they have to pay back the loans. A steep default interest rate increase is usually triggered when a borrower falls behind on their loan repayments or defaults on their finance. This sudden increase in the interest rate can be substantial and can make loan payments difficult to maintain. One of the best exit strategies for a bridge loan borrower is to borrow money when it is extremely necessary and they have a plan to pay off the loan before the end of the term.
Mistake # 3: Not providing the bridge lender with a story
Traditional lenders are straight forward in their finance process. A credit report, loan application, recent bank statements and two years profit and loss statements are usually all that is required by a borrower for the purpose of pre-approval or denial of their loan. When applying for a bridge loan, story by the borrower can influence the decision of the lender to provide the bridge loan as soon as possible. With the right kind of story, a bridge lender may consider providing the borrower with quick finance in order to deal with low credit scores, tax liens, a development project and pending foreclosures. Borrowers usually spend insufficient time to explain the story behind their request for finance.