In the context of hard money lending, a bridge loan refers to a short-term financing option that serves as a “bridge” between two transactions. A fix and flip loan is an example of a common type of bridge loan. Bridge loans are often used by real estate investors to secure funding quickly. They are commonly used for time-sensitive projects or to cover temporary cash flow gaps. With immediate access to capital, bridge loans allow investors to proceed with acquisitions or renovations while awaiting long-term financing or the sale of another property. Unlike traditional financing, a borrower’s creditworthiness is not the focal point of qualification. These loans are typically secured by the property itself and are based on the property’s value. The term of a bridge loan is typically shorter in duration. The term usually ranges from a few months to a couple of years.
The flexibility and speed of bridge loans make them attractive to investors who need immediate funding to seize opportunities or bridge financial gaps in their real estate endeavors. Once the long-term financing or property sale is secured, borrowers can repay the bridge loan. These loans facilitate a smooth transition between financial stages in investment activities.
What are the Key Pieces to a Bridge Loan?
In hard money lending, a bridge loan comprises several key components that are essential to understanding its structure and function. While the same is true for all loan products, let’s take a look at things within the context of bridge loans to give you an idea of what to expect. What’s covered here is a top-level overview of basic loan components, if you’re more interested in some of the metrics lenders calculate to determine your loan structure, check out the article linked here!
Loan Amount
We probably don’t need to explain this to you, but we will anyway! The loan amount refers to the total funds provided by the lender to the borrower. This amount is typically determined based on the value of the collateral and the borrower’s specific financing needs. While most investors use bridge loans to move quickly on a great deal they’ve prospected, these loans can also cover rehab/renovations costs in addition to the purchase price of the property.
Interest Rate
The interest rate represents the cost of borrowing the funds. Rates for a bridge loan are usually higher than traditional loan rates due to the short-term nature and perceived risk associated with this type of transaction. As of July 2024, the typical interest rate for a bridge loan is right around 11.000%. This will vary greatly depending on the lender you choose – some may charge as high as 18%, while lenders like Easy Street Capital offer bridge loans as low as 9.250%! Your rate is determined by a number of factors such as investor experience, leverage, and market conditions among other things.
Loan Term
Loan term specifies the duration within which the borrower is expected to repay the loan. Bridge loans are short-term and can range from a few months to a few years, providing temporary financing until the borrower secures long-term financing or completes a property sale. The typical bridge loan term you’ll find is somewhere between 6 and 12 months.
Repayment Structure
The repayment structure outlines how the loan is repaid. The most common structure is monthly interest-only payments with a balloon payment at the end of the term. This means that monthly payments are not going towards the principle balance of the loan. It’s very important to have a solid strategy or plan for your investment property going into the loan – remember that bridge loans, by design, are intended to be temporary financing solutions. You don’t want to have things go awry and be responsible for coming up with all of the funds to pay off the principle balance when the loan matures! To pay off this balance, investors typically go one of three routes:
- Use proceeds from the sale of a different property to pay off their bridge loan.
- Flip the property – selling off the subject property at a profit to cover the balance of the bridge loan.
- Refinance their bridge loan into a long-term financing solution, such as a DSCR loan, to capture appreciation in value of their asset and collect rent payments along the way.
Fees
Like any loan, bridge loans will include some fees. Common fees you’ll see are things like origination fees, doc fees, appraisal fees, underwriting fees, etc. An origination fee, sometimes called a closing fee, is charged by the lender to the borrower at closing. Typical closing fees for a bridge loan are anywhere from 2%-5% of the loan amount. You may hear your account executive refer to these as “points” as well – ex: “two points at closing” would mean there is an origination fee of 2% of the loan amount charged to the borrower at close. Other fees are commonplace as well. Borrowers should be cognizant of these costs and take them into consideration when evaluating the total cost of the loan as they can really add up. Easy Street is very transparent with their fee structure and the only fees typically charged at closing are the origination fee and the doc fee.
Who are Bridge Loans for?
The short answer is – everyone! Lenders providing bridge loans can qualify borrowers much easier than a traditional bank or credit union. The utility bridge loans provide in terms of streamlining fast closings is second to none. It is for this reason that these loans are used by all different kinds of investors – from complete beginners to seasoned professionals with decades of experience! Regardless of where you’re at in your real estate journey, bridge loans are always a valuable tool that can be used when the scenario calls for it.
Outside of investment properties, bridge loans can also be used to secure a borrower’s primary residence, or second home. The availability of bridge loans for residential owner-occupied properties will vary state to state – Texas, for example, does not allow bridge loans in these instances.
How do Investors use Bridge Loans?
One common use case is to bridge the financing gap between the purchase of a new property and the sale of an existing one. Investors may require immediate funds to acquire a promising investment property. Often times, though, their available capital may be tied up in another property that has yet to be sold. This is where bridge loans come in, providing the necessary financing to bridge this gap. They allow investors to proceed with the acquisition and avoid missing out on lucrative opportunities. Additionally, bridge loans are frequently used to secure funds for time-sensitive real estate projects. Property renovations or fix-and-flip endeavors are typically on a tight schedule. These loans provide quick access to capital for renovations or improvements to increasing a property’s value before refinancing or reselling.
Bridge loans also offer flexibility in situations where investors need to act swiftly. Common scenarios include purchasing properties at auctions or in competitive markets where traditional financing options may not be readily available. Overall, this type of loan serves as a valuable tool for real estate investors. Bridge loans provide the necessary liquidity and financial agility to capitalize on investment opportunities and maximize returns in the dynamic real estate market.
How do I qualify for a Bridge Loan?
As mentioned previously in this article, bridge loan lenders are much less stringent in their requirements compared to traditional banks or credit unions. The key factors that determine qualification and eligibility are relative financial reliability, collateral (the property), and experience to a certain degree.
While most lenders that provide bridge loans are not going to be requesting your tax returns or pay stubs, they will run your credit. A score in the mid 600s will allow a borrower to qualify. There are some lenders, such as Easy Street Capital, that can lend to borrowers with scores as low as 600 for bridge loans! Since bridge lending is generally an asset-based lending approach – collateral is crucial. Most of the due diligence conducted by the lender for a bridge loan will center around the property itself rather than the borrower’s creditworthiness. Lenders will assess its value to ensure it can cover the loan amount. An exit strategy is essential, such as a plan to sell the existing property or refinance the bridge loan into a long-term mortgage. This plan should clearly outline how you intend to repay the loan. Experience in real estate investment can be beneficial, lenders usually favor borrowers with a successful track record.
If a borrower excels in any one of these areas, they are unlikely to face any issues qualifying for a bridge loan. An investor looking to purchase a solid property in a growing market with a credit score over 700 and a couple flipped properties under their belt in the past year is an easy approval for lenders!
Why use a Bridge Loan?
Let’s take a look at some of the reasons a bridge loan might be a good financing solution.
Bridge Loan Benefits
- Quick Access to Capital – Bridge loans are usually the best option available for borrowers looking to move fast. Previous lender dropped the ball? Tight deadline? Find a great deal in a fast-paced, highly competitive market? Bridge loans are there to help you close as quickly as possible (days instead of weeks or months!) and stay on track with your real estate investing goals. Easy Street Capital can fund your deal in 48 hours!
- Lower Monthly Payments – Interest-only payments mean that borrowers are paying less per month than they would with a standard, fully amortizing mortgage. Bridge loans typically won’t carry prepayment penalties either, meaning the loan can be paid off at any time. If you complete renovations ahead of schedule, or if the other property you were waiting to sell is sold in, let’s say, the third month of your 9-month bridge loan term, you can pay off the balance right then and there!
- Qualification – Flexible underwriting, fewer guidelines, and less overall paperwork means that lenders can provide bridge loans to a much broader scope of borrowers compared to conventional financing.
This all sounds great! How do I apply?
At Easy Street Capital, we’re all about supporting investors in achieving their real estate goals. Our EasyFix program has helped thousands of investors across the country secure their next investment property with a bridge loan. If you’ve got a property in mind and are ready to go, reach out to us today! We can provide approval in 24 hours and fund your next deal within 48 hours!
Still have questions on bridge loans, or just looking to learn more? Click the button below and we’ll get you in contact with one of our Account Executives. We’re always happy to take a look at your loan scenario, or simply provide additional information on the loan programs available at Easy Street and real estate investing in general.
About the Author
- Fix and Flip - October 21, 2024
- Fix and Flip - October 21, 2024
- Fix and Flip - October 21, 2024
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