Bridge Loan Basics

Securing traditional bank financing to buy a property may be difficult when you need to close quickly, your finances are difficult to document, or you want to make improvements to a property. The same may be true if you own a business and need to pay the expenses related to your commercial property while you search for a new property, or need to stabilize a commercial property after you buy it in order to qualify for traditional financing. If any of these circumstances apply to you, you might want to consider obtaining a bridge loan.

Bridge loans are loans designed specifically to “bridge” a short-term funding need until more permanent financing can be secured. They offer borrowers the opportunity to “bridge” two separate financial transactions.

Why Might I Need a Bridge Loan?

There are a number of circumstances when you might want to consider a bridge loan.  While bridge loans can be beneficial for traditional home buyers, they are more commonly used by real estate professionals and investors. One of the more common situations where a bridge loan is needed is when a real estate investor needs to close quickly on the purchase of a property that he/she intends to remodel and sell. The need to close quickly and remodel may make securing a traditional bank loan less feasible or desirable. Accordingly, the real estate investor may go to a private lender for a bridge loan that will allow him/her to close quickly and cover the expenses of remodeling. Once the remodeling has been completed, the real estate investor may sell the property to pay back the lender of the bridge loan, or at that time refinance with traditional bank debt in order to keep the property.

Another common situation where a bridge loan is needed is if you are in the process of selling your current property, but have the desire or need to purchase a new property before you can close the sale. In such situation where you would be carrying the debt on both properties for a short period, your finances may not be strong enough to secure approval of a traditional bank loan. A bridge lender, however, will look primarily to the value of the new property to provide a bridge loan for the purchase of the new property.  Once your previous property has sold, you can use the money that you earn from it to pay off the bridge loan, or at that point secure more permanent financing through a bank. A bridge loan is beneficial in this situation because it allows you to purchase a new property before your current property has sold. Not being able to purchase a new property because your current property is still on the market is a problem that could cause you to miss out on a great opportunity which a bridge loan can remedy.  

There are many other circumstances where a bridge loan may be right for you, and the above are just two common examples. Generally, if you ever need a short term financing solution to bridge two financial transactions, and traditional bank financing is not feasible or desirable, you might want to consider a bridge loan.      

What are Typical Bridge Loan Terms?

The terms of a bridge loan may vary significantly from lender to lender, and also be contingent upon your particular needs, however, there are some general common characteristics of many bridge loans. One common characteristic is the short-term duration of the loan. Because the purpose of a bridge loan is to bridge two financial transactions, they off are written for periods ranging from 6 months to 24 months.  

Interest Payments on a Bridge Loan

Another common characteristic is the way that interest is paid. Because bridge loans are typically short-term and necessitated where the borrower may have cash flow constraints (such as during a remodel or when buying two properties), a bridge loan often requires interest only payments with a balloon payment due when the loan matures. This is different than a traditional bank loan where payments are typically amortized over a period of time to include payments of principal and interest.  While you typically will need to make monthly payments on a bridge loan during its duration, the principal balance and vast majority of the loan will likely not be due until the loan matures, or you are able to pay back the loan through a sale or refinance. 

Bridge loans also often require the payment of an interest rate higher than a bank loan (typically 7% to 10%), and the payment of a fee to the lender or broker arranging the loan (typically 1.5% to 3%). This is the byproduct of many factors including, but not limited to, the limited market of lenders willing to make such loans, the costs of their funds, the short-term duration of the loan, and the perceived additional risk.  

Where Can I Get a Bridge Loan?

Unlike standard mortgage lenders, bridge loans aren’t typically provided by standard institutional lenders like credit unions and banks. Most bridge loans are offered by private money lenders, who are non-institutional lenders that typically make real estate loans secured by a promissory note and a deed of trust. Some of these lenders also often limit these loans to real estate professionals or companies who are using the proceeds for investment, and not consumer, purposes.   

Finding the Best Bridge Loan Lender for You

To determine which bridge loan lenders are the best for your situation, use common sense. Just like researching any service provider, it is recommended that you solicit referrals from people that you trust and perform due diligence on the company and its track record. Visit their website, read reviews, analyze other loans that they have funded. And, if possible, it is highly recommended that you visit their office in person to get a first-hand look at their operations or, at the least, speak to someone at the company in a position of authority. Often times bridge lenders are smaller and less-hierarchical than banks, and you may be able to establish a direct relationship with a principal of the company.  

Once you’ve identified some possible bridge lenders, it is also recommended that you obtain several quotes to identify which lender offers the best interest rates and terms. While you shouldn’t necessarily choose the lender that offers the lowest interest rates and origination fees, this is a good barometer to use when conducting your search.

In our opinion, if you’re trying to choose between several reputable bridge lenders with similar terms, the most important characteristics to look for include a great reputation, a significant amount of experience, and personalized attention throughout the lending process.

How Do I Apply for a Bridge Loan?

Once you’ve selected a bridge lender or perhaps during the selection process, you’ll need to apply for the loan. One of the more favorable aspects of bridge loans, when compared to traditional loans, is that they typically come with a much faster application and approval process. After you’ve filled out the application, the lender will typically take a short period of time to review the application and request additional information necessary to preliminary evaluate the loan, which will likely include pertinent information about the subject property, your credit score, and a personal financial statement. Assuming the lender has enough preliminary information, the lender may then provide a Letter of Intent or term sheet detailing the proposed terms of the loan based on certain stated conditions and the completion of underwriting, for you to review and approve.  

The Approval Process

Once approved, the lender will proceed to gather additional information needed to complete the loan file and fully underwrite the loan. Such additional steps often entail opening escrow, generating a title report, securing an appraisal or other opinion of value. Once the lender is fully satisfied with the loan file, loan documents will then be drawn, and the loan will be moved to closing. The duration and complexity of this process will vary based on the scope and complexity of the subject loan, but can at times be completed within as little as 2 business days.   

Will I Qualify for a Bridge Loan?

If you’re wondering how to qualify for a bridge loan, the standards are typically leaner and less robust than the standards employed by traditional banks. While the criteria will vary from lender to lender, most bridge lenders are “asset-based” lenders, meaning that the primary qualifying factor is the value of the property securing the loan. Private money bridge lenders typically lend an amount based on a percentage of the property value. The amount of your loan as a percentage of the property value is known as the loan-to-value ratio.  

While private money lenders will also typically evaluate the financial strength, credit, and quality of the borrower, these are often secondary factors.  Accordingly, unlike a traditional bank, you can typically qualify for a private money bridge loan without having to provide as many financial data, such as numerous years of tax returns, and without the same financial strength that may be required for a traditional bank loan.  

However, because private money lenders focus less on the borrower’s financial strength and ability to repay the loan, they typically lend at a lower loan-to-value ratios than traditional banks. Where a traditional bank lending on a traditional mortgage may lend up to 80% of the property value, private money bridge lenders often times lend in the 60% to 70% range. However, the loan-to-value ratio will, of course, depend on a number of other factors involved.