The length of caveat loan typically ranges from 2 weeks to 3 years while waiting for the approval of a longer-term loan or a larger one. It is a short-term loan which is often called a “bridge loan” because it is an interim financing for an individual or business until the next financing is arranged.  The borrower usually gets a new financing to repay the caveat loan and to finance other business needs.

Are caveat loans cheaper than conventional financing?

Many lenders consider this type of loan as a risky type of financing that’s why they typically charge a higher interest rate and fees, plus other costs to compensate for that risk. The loan costs are amortized within the short period of the loan. Some lenders may also charge various fees and oblige borrowers to have a lower loan-to-value ratio and a cross-collateral. But, unlike other loans which usually entail a lengthy loan processing time, caveat loans are typically arranged quickly with minimum documentation required.

Uses of caveat loans

Many real estate investors turn to a caveat loan to purchase commercial real estate property.

Here are the benefits of this loan:

Quickly close on the property you want to purchase. If the commercial property is that good, why would you wait until someone else tries to buy it? Getting a loan is a good option to beat competitors who are eyeing the property you want to buy. If you are able to close the deal quickly, you can also start working on your business immediately.

Redeem foreclosed property. Do the statutory redemption laws allow you to pay for the foreclosure sale price and retrieve your property within a limited amount of time? Foreclosure laws may only limit the redemption period from two months to a year, so it is vital for you to get a bridging loan before they are sold to the bidders. If you are one of the bidders on a foreclosed property, you have to keep your bids up and pay as soon as the foreclosed property is up for sale, otherwise, some commercial real estate investors may outbid you.

Make the most of a short-term opportunity to obtain long-term financing. Instead of spending your time worrying about how your new loan is going to be, you may want to get a short-term financing today to get things started. It will give you an opportunity to explore your new commercial property and perhaps your new neighborhood in advance

While waiting for the big day, when your capital will be filled up and you’ll be ready to do the leg work of your new business; you can take advantage of the caveat loans and use the money to pay for small things that will really matter a lot when you finally relocate. It will give you time to make a well-thought-out business plan that not only eliminates stress but can also make the entire kick-starting process of your business more organized.

caveat-loan-bridging-loan

When to repay your bridge loan

When determining the length of caveat loan, remember that it is used during your transition period—thus, you have to repay it when the following circumstances occur:

  • The property is sold
  • You are able to improve or complete your property
  • You refinanced the property with a new lender
  • You made a specific improvement or change that qualifies your property for a bigger mortgage or refinancing
  • Your creditworthiness improves

If you’re a businessman in need of additional operational funds, you may apply for this type of loan while waiting for your business loan or until you are able to raise money to repay it through management buy in, additional stockholders and the like.

Developers may apply for bridge loan to carry out their project while waiting for the approval of their project’s permit. The lender may charge them a higher loan interest rate because there is no guarantee that the permit to carry out the project will be given by the authorities. Once the developers obtained the permit, the project becomes eligible for larger and longer-term loans with lower-interest. When the new loan like construction loan or mortgage is granted, they can use it to repay their caveat loan and fund their project to completion.

The same thing goes for consumers who are putting their home up for sale and intends to purchase a new home and plans to make a down payment with the proceeds from the sale. They can apply for caveat loan using the equity out of their current home and use it as down payment on the new home. The caveat lender will rely on the expectation that their current home will close shortly and they will be repaid.

Do you need money right now for your business or a new investment while waiting for a new loan or source of income? Why don’t you contact NSW Mortgage Corp today to see if what length of caveat loan applies to you?