Interim financing can be invaluable in various real estate scenarios. Borrowers often rely on funding interim to close deals quickly or purchase fixer-upper properties and can even bridge any gaps between property purchases and sales transactions.
Documenting a valid business reason and adhering to specific procedures are required before providing interim financing. Mortgage Loans offer flexible solutions.
Real estate financing
Real estate financing can be an indispensable resource in various situations, whether purchasing fixer-upper properties or funding new construction projects. Financing options range from private lenders, online lending platforms, and credit unions – each has different requirements and terms that must be researched before selecting one as your funding source.
Interim financing is a form of capital that bridges funding gaps between the predevelopment, development, and construction phases of commercial real estate projects. Funds provided for interim financing may help until permanent loans can be secured or rent payments are collected. Nonprofit organizations, state housing finance agencies, and the Department of the Treasury’s Capital Magnet Fund may all serve as sources of interim financing.
Interim financing comes in many forms, from invoice and factoring to asset-based lines of credit, equity investments, and venture capital. Each option offers different advantages and drawbacks; the most commonly utilized approach is short-term loans designed to bridge cash needs until long-term financing arrangements can be finalized.
Home equity loans can also provide interim financing – this option allows you to use the equity from your current property as collateral for the mortgage of the new one. It is an effective solution if your current house won’t sell quickly enough for two mortgage payments until closing on both properties occurs.
Other interim financing solutions may include temporary or bridge loans, which typically last no more than three years and provide quick access to permanent funding sources. Other alternatives to traditional mortgages can consist of lines of credit (unsecured or secured), asset-backed lines of credit, and loans from commercial banks – often at much cheaper rates and with more flexible repayment schedules than their conventional counterparts.
Bridging financing
Bridging financing, also known as gap or swing loans, provides temporary funding to individuals or businesses while they await larger financial arrangements to take effect. Also referred to as bridge loans or swing loans, bridge financing has many applications; for instance, real estate investors often use it to acquire properties at a bargain price before renovating and flipping them quickly at a profit. They can usually be set up soon without collateral security requirements, although current homes may provide collateral if necessary.
Bridging loans can be risky and should only be undertaken if they fit your circumstances perfectly. Therefore, it is wise to thoroughly research this form of finance before embarking upon it. While specific requirements vary between lenders for bridging finance agreements, most will require, at minimum, a deal on your current property, proof of funds for your new purchase, and possibly registered valuations of both homes before being considered for approval.
Home equity lines of credit (HELOCs) offer an alternative form of bridging financing that can provide more flexibility and shorten repayment periods than personal loans, typically having interest rates as low as 2% or lower. Keep in mind, however, that your HELOC’s value will fluctuate with market trends, so be wary when taking out such financing arrangements.
Bridging loans can be used for numerous reasons, including:
Bridging loans are used primarily to prevent losses on assets expected to generate more significant revenue than their original investment. For example, mining companies can obtain $12 million in funding from venture capital firms for new mine development, but it’s uncertain whether this revenue will cover repayment within one year of receiving their loans from those firms. As a result, any such bridging loan must be taken out cautiously, with surcharges added for interest surcharges.
Bridging loans offer businesses needing instantaneous cash a fast solution while they wait for long-term financing or private equity funding to arrive. Bridging loans can cover operating expenses, acquisition costs, or down payments on properties while typically being approved within two weeks.
Two-time close construction loans
Two-time close construction loans allow you to borrow money gradually during the building phase of your home. After applying and providing financial documents, plans, and project timelines, a lender may approve funding in increments known as draws; each draw is released after inspection to verify work has been completed before being released for distribution. They’ll also send monthly statements detailing loan amounts disbursed and interest accrued.
One of the primary advantages of construction financing is being able to lock in an interest rate early, eliminating risk from rising rates during construction, and possibly reducing inspection requirements from lenders during this time.
Traditional two-time close loans require qualifying not just once but twice: once for your construction loan and again when switching to your permanent mortgage (the “take-out”) loan. This process can be lengthy and time-consuming for those managing multiple obligations simultaneously.
Two-time close construction loans may make estimating the true costs of building your home difficult during its construction phase, making it hard to ascertain its true worth. For example, suppose your builder makes mistakes that cost more than expected. In that case, you may need to cover those extra costs yourself, so having sufficient savings may help cover these unexpected additional costs if building an expensive home.
One drawback of a two-time close construction loan may be that if property values decline or your credit situation changes between when you closed on the construction loan and when applying for your permanent take-out mortgage loan, qualifying might become impossible; you would then either have to repay off your construction loan or lose the house. Many buyers find the one-time closing option more desirable for this reason.
Interest surcharges
Interest surcharges are fees lenders charge in exchange for their commitment to provide credit at a specific date, similar to standby fees but more directly compensating them for future loan promises. Both costs fall under SBA regulations; lenders cannot charge “prohibited fees,” such as commitment fees, origination fees, or points on interim loans that exceed maximum allowable rates; any prohibited fees collected must be returned when refinancing occurs.
Borrowers can avoid paying interest surcharges by rolling closing costs into their mortgage balance; however, this will increase the principal amount and thus cause higher monthly interest payments. Negotiate with a lender for a lower rate, but this takes time and effort on their part.
Interim loans can be an invaluable asset to small businesses seeking construction financing from MassDEP and permanent lending sources, filling the void between project approval from MassDEP and permanent funding. Trust borrowers may save both money and effort by opting for interim loans instead of short-term construction loans; additionally, these no-interest, no-fee loans from Trust are offered free of interest and fees while commercial lending partners may retain a servicing fee for up to six months of each interim loan provided by them.
