When you made the decision to buy an investment property, you likely financed the purchase with some type of mortgage loan. Though you’ll eventually pay the loan off in full if you stay in the property, what happens when you decide to sell it in the future? You’ll need to come up with the money to pay for your new property to continue growing your business. However, if you’re like most commercial property investors, you may not have the cash you need upfront to secure the purchase. That’s where California hard money lenders can help by issuing you a gap mortgage.
What Is a Gap Mortgage, Exactly?
A gap mortgage is a loan issued by dedicated bridge loan lenders that helps you cover costs incurred between the sale of your old property and the purchase of your new one. For example, some borrowers use these loans to cover the down payment costs for the new property. Others use them to cover the down payment and to pay off the remaining amount owed on their original mortgage. These loans are short-term loans which means you’ll have less time to repay the loan if you accept the money.
How You’ll Pay It Off
Once you sell the original property, you’ll use the proceeds of that sale to pay the gap mortgage off in full. This includes the loan principal, any interest accrued and any fees associated with the loan itself. You won’t have to worry about paying for the loan out of pocket unless the sale of your original property falls through. Once you pay off the loan, your California hard money lenders will settle your debt once and for all.
How To Apply for a Gap Mortgage
Unfortunately, there aren’t many gap mortgage lenders out there and traditional lenders tend to stay away from offering these types of loans. You won’t be able to apply with your preferred bank or credit union. Instead, you’ll need to work with private money lenders to apply for this type of financing.
As with any loan, private money lenders will take your finances and credit score into consideration. If you’re established in the commercial real estate market, you’ll have a good chance of qualifying for financing. However, if you’re new to the industry, you may not be able to get a gap mortgage. You’ll need to look for alternative methods to get money for a down payment or wait until you close on your original property to make an offer on a new one.
When They’re a Good Choice
Gap mortgages aren’t ideal for every buyer. They’re best for those that need to move on properties quickly in order to take advantage of openings in the market. If you’re comfortable waiting to buy a property until your original one sells, you’ll typically be better off.
Remember, gap mortgages have high interest rates and high origination fees. This can take a toll on your ability to make a profit from the sale of your original property. Only apply for this type of financing if your overhead costs are low and you’re sure that you’ll be able to repay the loan in full without hurting your bottom line.
