Bridge loans are short-term financing options that fill the gap between closing the deal and gaining permanent financing. While they typically have higher interest rates and require collateral, they enable borrowers to take advantage of housing opportunities.
For example, a real estate broker waiting to close a sale on one property may identify a fix-and-flip opportunity. This broker can use a bridge loan to buy the new property to cover costs until the other sells.
This scenario highlights one of the common reasons why real estate investors may require a bridge loan. Traditional loans, in contrast, operate on slow approvals, inflexible terms, unreliable draws, and unclear pricing. All of these variables contribute to slower timelines.
The right bridge loan terms, however, can save money and fuel long-term growth.
Decoding Bridge Loan Financing For Investors
Real estate bridge loans aren’t standardized solutions. They differ depending on the lender and the lender’s understanding of the borrower. For example, while many bridge loans last six months, that’s hardly the maximum time. Some bridge loans extend up to three years. Thus, the idea of a short-term loan is rather flexible.
These loans are also unique. Unlike other financing options, bridge loans encompass a wider array of properties. Traditional loans often reject poorly maintained properties or ones without occupancy. Bridge lenders don’t factor in these variables, making bridge loans perfect for Fix & Flip, Fix to Rent (BRRRR), or even New Construction properties.
In addition, there are three different ways to use these short-term real estate loans. You can secure the bridge loan with the following:
- a new property being purchased,
- an existing home, or
- the current property, using it for the downpayment, and the new property, using it for the remaining balance.
Typically, interest rates for these loans are higher than traditional loans. Due to the short-time frame and the fact that payment is contingent on a closed property deal, lenders deem the risk higher. This is true whether you are looking at Fix & Flip bridge loans or New Construction bridge loans, and everything in between.
Who Should Use Real Estate Bridge Loans?
Bridge loans aren’t specific to real estate investors. A bridge lender offers similar services to homebuyers. However, bridge loans for investors provide support for several different project types, including:
- Fix & Flip investors
- Fix to Rent (BRRRR) investors
- New Construction builders
- Investors repositioning properties before long-term DSCR financing
Rather than focusing on whether you are the right market for this service, it is often more beneficial to look at bridge loan rates and terms and compare them to your other options.
Finding and acquiring a bridge loan is simple. Finding the right lender, however, may require some legwork.
Why Choosing the Right Bridge Lender Matters
Your bridge lender sets the terms and interest rate for the loan. Borrowing from a general financing solution or a bank is often cumbersome, and the lenders lack the expertise to understand the potential value and risk related to real estate investing.
Lenders can impact the speed to close, which in turn affects your project timelines, the cost of capital (interest rate), and long-term scalability of your investment strategy. The wrong lender with restrictive bridge loan terms can delay projects, depress revenue, and create funding constraints down the road.
For example, you are selling one property to afford a new rental. A poorly structured Fix to Rent bridge loan might limit renewals or have a slow draw speed, resulting in cash flow bottlenecks.
Yet, Fix & Flips, (BRRRR, and New Construction projects can all benefit from bridge loan options. For success, it’s important to have a quality lender. They won’t just fund one project, but hopefully many more.
Common Mistakes Investors Make When Choosing a Bridge Lender
As with any financing tool, there are risks when choosing a bridge lender. Here are some common mistakes to avoid when evaluating your options:
- Chasing the lowest rate only – Low interest rates can be appealing, but when combined with long approval periods or hidden conditions, they can cost you more down the road.
- Ignoring draw speed and support – Slow disbursement speed affects your timeline directly. Poor customer support, in the case of draw issues, can create further setbacks.
- Not reviewing extension policies – There may be cases when you need a loan extension. Failing to account for this can leave you short—with a bridge loan to pay back.
- Choosing lenders without scalable programs – Some lenders grow with you, creating solid long-term relationships and the confidence to borrow when required.
Bridge Lender Financing Red Flags
Knowing red flags provides another layer of protection and allows you to remove lenders from your list early on. Here are some easy-to-spot red flags when it comes to bridge loan lenders.
- They don’t perform a credit check.
- The process feels rushed.
- The interest rate is suspiciously low.
- The lender claims there is a limited time to make a decision.
- Advertised rates and terms act as a bait-and-switch.
- Terms include prepayment penalties, late payment fees, and other hidden fees.
- Terms are vague and open the investor up to risk.
Some of these may be forgivable in isolation, such as a low interest rate. A lender exhibiting several of these red flags should be removed from your list immediately.
The Top 5 Most Important Things to Look for in a Bridge Lender
Evaluating lenders and bridge loan terms often feels taxing. However, the criteria required to identify the best bridge loan lenders for you are concrete. Below are our top 5 features to consider when reviewing your bridge financing options.
1. The Technicals: Speed, Certainty, and Reliability of Funding
Ideally, funding will be fast. Quick approvals and closings help you meet your deadlines. Accelerated processing is often due to clear underwriting, having a consistent funding track record, and industry expertise.
2. Flexible Loan Programs and Structures
Flexible loan programs can help you fund Fix & Flip, BRRRR, and New Construction projects. They also provide flexible Loan-to-Cost (LTC) and Loan-to-Value (LTV) construction loans.
Loan-to-Cost measures how much of your total project cost the lender will cover. A higher or more flexible LTC protects the lender and investor from underestimated timelines, delays, and cost overruns. Most lenders cap this metric at around 80%, but flexible lenders can still fund 100% of the cost.
Loan-to-Value functions a little differently. The LTV measures the loan amount to the project’s After Repair Value (ARV), thus protecting lenders from market changes. While an LTV sounds more restrictive, it can at times offer more leeway for investors, given the housing market often experiences higher value increases in comparison to cost overrun.
You’ll also want to look at interest-only options, extensions, and draw flexibility to maximize your bridge loan.
3. Transparent Pricing and Terms
A clear breakdown of rates, fees, extension terms, prepayment policies, and additional terms is vital to selecting the right lender. A sound and legitimate bridge loan lender will be completely transparent about all fees and costs associated with the loan.
The clearer your loan terms are, the easier planning for contingencies will be. For example, what if you obtain permanent funding faster than expected? You don’t want to be charged extra for paying off your bridge loan early.
4. Streamlined Draw Process and Construction Support
Draw efficiency translates into how easy and quickly you can access funds. Flexible and efficient draw systems can positively affect your timeline and budget. But slow and cumbersome draw processes end up slowing down your project.
Virtual draws, for example, are a great way to accelerate cash flow. A virtual draw enables disbursements based on real-time, virtual updates as opposed to in-person inspections, which must be scheduled and can be at risk of rescheduling.
Faster draws translate into fewer contractor delays and meeting deadlines. It’s that simple.
5. Experience, Reputation, and Investor Support
Industry experience and specialization can also affect your support and flexibility. Lenders with little real estate experience tend to be more rigid, but those that specialize in real estate lending understand the constraints investors are under.
You’ll want to look for lenders who have dedicated loan advisors and have the capacity to scale with investor growth.
Final Thoughts: Building Long-Term Success With the Right Bridge Lender
Bridge loan financing for investors is a critical tool for success and long-term growth. These short-term real estate loans offer investors a way to capitalize on opportunities, close more deals, and drive revenue. However, the quality of the loan hinges on the quality of the lender.
The right bridge loan lender offers fast, flexible, and reliable funding. Everything from terms to informal communications highlight the lender’s transparency. The draw process, ideally, should be streamlined to ensure timelines are met. These expectations are only possible with a lender that has industry experience and a strong reputation.
LendingOne offers investors a supportive and transparent approach to bridge financing. Specialized in real estate investing, LendingOne provides short-term and long-term opportunities for growth with:
As a real estate investor, you understand the importance of time. Don’t wait to decide if LendingOne is the right bridge loan lender for you.
Speak with a Loan Advisor About Bridge Loans today.
