How to Secure Short-Term Bridge Financing for Real Estate Deals

A bridge loan is a way of financing a property purchase that “bridges” a temporary monetary gap. This allows the purchase of real estate while waiting for expected funds to arrive from another source. They are short-term loans, typically lasting from a few weeks to a maximum of two to three years. In practice, most terms are towards the shorter end of the timescale, with weeks or months being the usual timeline, rather than years. 

While the loans do have an official end date, they are most commonly open-ended (although closed-ended bridge loans do also exist). This allows for early repayment without an additional fee. Short-term bridge financing is provided via both traditional and non-traditional lenders.

Understanding Short-Term Bridge Financing

• What is short-term bridge financing?
• Who is eligible for a short-term bridge loan?

What is short-term bridge financing?

Short-term bridge financing comes under many names. You might it referred to as, simply, a bridge loan—or, as one of the following:

• An interim loan.
• A swing loan.
• Gap financing.
• Caveat loan.

In terms of real estate, the terminology doesn’t really matter. Each is talking about the same thing—namely, a loan that covers the financing requirement for a short period while the buyer waits for the funds to come from another source.

Some examples include:

• The fix & flipper: An investor who’s completed the renovation works on a current project and is ready to sell/has sold and is waiting for the process to complete. In the meantime, they are keen to close on their next project and need the funds to tide them over while waiting for the sale to conclude on the last property.
• The BRRRR investor: In the same vein, someone with a BRRRR property towards the end of the journey (refurbished and either waiting for or having secured a tenant) who is waiting for the refinancing to be put into place but wants to purchase the next portfolio addition in the meantime.
• The home mover: An individual selling their main residence and buying another, without waiting for the property deal to be closed on the house they live in before buying the next.

No matter the reason for borrowing, the key points of a short-term bridge loan are:

• They are available fast—often with funds being released in mere days.
• They are a flexible form of borrowing, with many lenders tailoring them to suit individual requirements.
• They are short-term, usually with a term of one to two years—although three-year terms aren’t uncommon.
• In general, most come with interest-only payments during the loan term. The outstanding amount is paid at (or before) maturity. This is generally when the expected funds arrive from the awaited source.

Who is eligible for a short-term bridge loan?

This tends to depend on the lender that provides the funding. There are two options: banks/traditional financial institutions or a hard money lender.

Bridge loans from a bank or mainstream lender tend to place significant demands on the borrower. They will require:

• An excellent credit rating.
• A low debt-to-income (DTI) ratio.
• Proof of the incoming finance (such as an upcoming property sale).
• Substantial equity in the currently owned property.

However, taking out a short-term bridge loan from a hard money lender tends to have less stringent criteria. This is because such financers aren’t bound by the same legislation as banks. While they must, of course, only back responsible lending—and adhere to strict state and federal rules— these allow a very different lending model. This tends to rely less on credit ratings and more on the value of the property/properties that are being lent against. Because of this, there’s usually no need for extensive employment and income verification or the need to provide tax returns.

However, this additional risk is represented by higher fees, with the percentage you’ll pay for a hard money bridge loan typically being a little higher than what might be achievable from a bank. On the plus side, the money will be available far faster, with close times typically measured in days, as opposed to weeks. This can be a massive advantage, especially in the cut-throat world of real estate when moving quickly is very often the difference between securing the deal or losing out.

Using Short-Term Bridge Loans for Financing Real Estate Deals

• Where to get short-term bridge financing?
• How to prepare for a successful short-term bridge financing application
• Securing the best interest rates, terms, and conditions

Where to get short-term bridge financing?

As already mentioned, short-term bridge financing can be achieved via both traditional and non-traditional lending.

If going down the former route, then the first line would be to speak to a bank or existing mortgage provider. This can be done directly or via a broker.

For those looking for a non-traditional bridge loan, there is no shortage of hard money lenders vying to provide funds. This also means that there is a huge disparity between deals on offer. These range from poor to excellent and, as with all financial contacts, it’s a case of not only seeking out the most advantageous, but also in reading and understanding the small print.

When it comes to using a hard money lender for financing real estate deals, it can’t be stressed highly enough how important it is to go with a firm that’s both experienced in the field and has a proven track record. 

The amount that you can borrow will be determined by what’s termed the “loan-to-value” (LTV) ratio. In very simple terms, this means that the value of the property on which the loan is secured determines how much can be lent. Generally, this is capped at 65%—or perhaps 70%—in total, although this will depend on the type of real estate asset. Land or commercial properties may have a lower maximum LTV because they often represent a higher risk.

How to prepare for a successful short-term bridge financing application

Whether applying through a bank or a hard money lender, a major key to the fastest acceptance is in the preparation.

This means:

• Requesting a realistic amount: Yes, banks and money lenders exist to fund real estate aspirations but can only do so within acceptable risk margins. Where these lie depends on the type of lender, the value of the property, and—especially in the case of banks and traditional lenders—a strong credit rating and proof of income and/or employment.
• The property details: Of the real estate to be financed.
• Having proof of the LTV: Whichever the lending route, adequate certification to prove the value of the property will be needed. This is generally done through a recent professional market appraisal report.
• An exit strategy: The plan to repay the loan (such as from the sale of the original property).

If going down the bank lending route, additional financial proof will be required. This might include, but isn’t restricted to, employment verification, tax returns, debt-to-income ratio, credit score, and more.

Securing the best interest rates, terms, and conditions

There is a wide difference between lenders offering short-term bridge loans for financing real estate deals. While all agreements will have an ultimate deadline, most deals don’t charge for early repayment. This is because, generally, the circumstances that require this kind of lending don’t have a guaranteed end date. For the borrower who’s waiting for a property sale to complete, the potential for this to change should be considered the rule, rather than the exception.

However, one thing that potential borrowers must be aware of is how interest is charged. As already stated, the interest rates on a short-term bridge loan are higher than mortgages and other types of real estate borrowing. The interest payable can be either fixed or variable. With the former, the interest charged will remain the same, no matter what happens to the economy. With the latter, this will alter as any interest rate shifts come into play.

There are many cases where a bridge loan can be successfully leveraged for financing real estate deals. However, as with every monetary commitment, borrowers should only do so following due diligence. Understanding the finer details and securing the best interest rates are key to avoiding unnecessary costs and ensuring that the borrowing costs are kept as low as possible.

Looking for Short-Term Bridge Financing? BRRRR Loans Offer the Ultimate Choice for Financing Real Estate Deals

In the complex world of property funding, BRRRR Loans provides a refreshingly simple approach for financing a variety of real estate deals. Whether you need short-term bridge financing or a solution for your next fix & flip or BRRRR, we offer some of the shortest closing times and competitive interest rates in the business.

We fully comply with all industry regulations and, as a responsible lender, work with companies and individuals looking to begin or expand their property ambitions—as well as providing funds for more personal situations, such as the need for short-term bridge financing when moving primary residence.

Find out more at https://www.brrrr.com/loan-programs/bridge-loans and call our expert team today to discover the art of the possible.