How do Bridge loans work?

Question

I'm just starting out, I have never used a loan and I'm having trouble understanding what's normal for loans. I'm  Specifically interested in bridge loans and what is normal for them.

Riaz Gillani · Answer

A Bridge Loan is a mortgage loan secured by the property wherein the proceeds are used for the purchase or refinance and the subsequent renovation of such property ... ideal for a Fix and Flip or Fix to Rent. They are short term in nature - think 12mo term and are Non-Amortizing (aka no principle pay down - Interest Only Payments). They effectively 'bridge' an investor from the entry stage (distressed property or need to close quickly) to the takeout (sale or refinance).

What's normal for them: Like I said before, interest only payments. Also higher interest rates than you may be accustomed to when getting long term loans (9.00 to 12%+). Generally no prepayment penalty so you can effectively dispose of the loan at any time without incurring a fee. May or may not have a construction reserve held in escrow. They should close somewhat quickly (14 to 30 days on average).

A lender qualifies or approves of them by using the values (AIV and ARV) of the property and maybe some metrics on the borrower (experience and / or credit score). Tax Returns, Income, DTI all non-factors.

Be careful who you trust in the space. A lot of money and time can be wasted if you jump in with the wrong lender.

Ryan Deasy · Answer

@Seth Baumgartner

i have done alot of hard money loans. typically if the loan is your first one or your first deal. the terms will not be as great. HMLs want to see experience etc. i am happy to share specifics if you want.

Jack Mawer · Answer

A bridge loan could help you out if you are looking for quick funding for a purchase/rehab of a property or even new construction. You will typically receive funds for the transaction quite quickly. Many people pursue this type of financing for a quick turn around on a property, with the idea of the property being able to cash flow well after being rehabbed. You will see higher interest rates for these types of loans (8.5-12%) but you should ultimately have the goal of obtaining long term debt afterword's with a lower interest rate (bridge loans are only 6-12 months so you will want to look at refinancing when the property is ready to rent). Many lenders have a hard money team who can provide you with a bridge loan as well as a long-term debt team to help you refinance when necessary. I agree with Riaz here, lots of lenders in this space are not trustworthy, let me know if you want to discuss your options

Andrew Garcia · Answer

Hi @Seth Baumgartner, a bridge loan is typically interest-only for 6-24 months with a balloon payment at the end of the period.

It is typically used to buy a property while you secure long-term financing. Then, once the bridge loan gets close to coming due, you refinance into a long-term DSCR or conventional loan.

Why are you looking to use a bridge loan?

Andrew Garcia · Answer

@Seth Baumgartner, if you have no real need for a bridge loan, then you should probably look into other financing.

It can be expensive to refinance and while you have the bridge loan, you will be paying a higher interest rate.

If you would like a referral to a lender that can help you flesh out your financing strategy, I would be happy to provide one.

Feel free to reach out to exchange information.

Account Closed · Answer

Bridge debt is typically used in large multifamily deals for juicing returns as they offer interest-only payments, during times when a lot of money is needed for value add

Gary Brown · Answer

Hey Seth a Bridge loan is best used for situations where you know there's a clear exit strategy. Fix and Flip loans are a sub category of Bridge loans that allows you to close on your purchase and have your rehab funds available for reimbursement. Most bridge loans are less strict underwriting guidelines because the payments are structured as interest only. Happy to talk to you in depth for any scenario you're looking at.

Michael Colangelo · Answer

I'm a newb here :D

I'd like to buy my next primary residence using a VA loan and use a bridge loan at the same time to refresh my current property before selling it.

After selling the current primary residence, I'd like to take the proceeds to eventually purchase an additional SFH rental property or two.

Any issues with that?

Seth Baumgartner · Answer

@Jack Mawer I would love to.

Seth Baumgartner · Answer

@Andrew Garcia I am looking for loans, I just discovered the retail investing world, so I'm wanting to learn as much as I can as fast as I can.

How do Bridge loans work?

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