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Understanding Bridge Loans

reviewing a loan agreement - bridge loans

Breaking into the real estate investing sector can be difficult if you are unsure of where to start. Many investors face unexpected challenges during the initial stages of their investing journey, such as difficulties securing the funding required to close deals. The good news is that bridge loans (also known as swing loans) are viable funding solutions for investors of all experience levels and budgets. 

At Express Capital Financing, our team of experts has decades of experience helping investors leverage the resources available to them to accomplish their goals.  In this comprehensive guide, we’ll help you determine if a bridge loan is an ideal source of funding for your next investment project. Let’s dive in and uncover the secrets of bridge loans – the game-changing funding option that can help you achieve spectacular returns in the ever-enticing world of real estate investing.

What Are Bridge Loans?

Say you’re all set to purchase a promising investment asset, but it requires you to have capital on hand immediately. Going through traditional sources such as banks or credit unions could take weeks or even months to get you the money you need, especially if you are attempting to acquire a loan backed by the government via the Small Business Administration (SBA). In an increasingly competitive real estate market, investors simply cannot afford delays associated with traditional loans that could literally make or break a deal.

That’s where private money lending comes into play. A bridge loan from Express Capital Financing allows investors to submit a cash offer while avoiding having to jump through any of the tedious hoops involved with conventional mortgage providers. Bridge loans are a type of short-term financing option with term lengths typically under a year, specifically structured to allow you immediate access to the money investors need to close the deal on a real estate opportunity.

Bridge loans are perfectly suited for fix-and-flip investors and real estate developers planning to acquire property, make improvements to it and sell it at a significantly increased price. The funding provided by temporary financing allows them to make the initial purchase and cover the costs associated with the rehab or construction while they finalize the details of a longer-term loan or permanent financing they can transition to after repaying the bridge loan.

Qualifying for a Private Money Bridge Loan 

A key aspect of private lending is that it is a form of asset-based financing, meaning any loan is secured by either the property being acquired, or existing real estate already owned by the borrower. The team at Express Capital Financing implements an efficient and common-sense approach to the underwriting process when evaluating potential deals meaning that the long-term profitability of the deal is the focal point as opposed to a borrower’s creditworthiness. A primary factor determining the amount of financing you can qualify for is the loan-to-value (LTV) ratio associated with the property. Generally, the higher the LTV ratio is, the riskier the deal is.

The LTV ratio is a figure that lenders reference to evaluate the risk level involved with extending credit to potential clients. LTV is calculated by dividing the proposed loan amount by what the property was appraised for and then multiplying the result by 100.

LTV (%) = (Proposed Loan/Appraisal Value) x 100 

Advantages of Private Money Bridge Loans 

Private money bridge loans are great options for investors looking for quick access to financing to close a deal in markets currently dominated by all-cash buyers. Here is an overview at some of the primary benefits of strategically using a bridge loan to fund your next investment transaction.

Instant Cash Flow: Investors often turn to private money loans after discovering the significant delays and stringent qualification prerequisites associated with traditional lending or they need cash flow to bolster their operations while awaiting the approval on a conventional loan. In either case, traditional bridge loans give them immediate access to the cash they need to take the initial steps of pulling off a successful investment move whether that’s acquiring the property itself, paying contractors to complete renovations on a distressed home, building a multi-family unit or all of the above.

Simplified Underwriting Protocol: Private money loans are collateralized by the underlying property, meaning that a borrower doesn’t have to have a stellar credit score or savings in order to qualify for a bridge loan. If the deal makes financial sense, Express Capital Financing will work with you to craft individually tailored, flexible funding solutions to make it happen. We leverage our extensive experience and ample resources to provide you with the insight and means to create an informed, effective investment strategy.

Flexible repayment options: Flexible repayment options are a key feature of bridge loans, offering borrowers various ways to structure their loan payments to suit their financial circumstances. One common option is interest-only payments, where borrowers pay only the interest on the loan during the term, deferring repayment of the principal until the loan matures or until the sale of their existing property. This arrangement helps borrowers manage their cash flow by reducing their monthly payment obligations. 

Another option is balloon payments, where borrowers make a single, lump-sum payment of the principal amount at the end of the loan term. This allows borrowers to defer repayment of the principal until a later date, typically when they sell their existing property or secure long-term financing. Additionally, some bridge loans may offer customized repayment terms, allowing borrowers to tailor the repayment plan based on their income streams, anticipated cash flow, and other financial considerations. These flexible repayment options empower borrowers to structure their loan payments in a way that best aligns with their financial goals and circumstances, providing greater control and flexibility throughout the loan term. 

Interest reserve accounts: Interest reserve accounts are a useful feature often associated with bridge loans, providing borrowers with additional flexibility in managing their cash flow during the loan term. With an interest reserve account, a portion of the loan proceeds is set aside by the lender to cover interest payments for a specified period, typically ranging from six months to one year. Instead of making monthly interest payments out of pocket, borrowers draw funds from the interest reserve account to cover their interest obligations. This arrangement helps borrowers preserve their liquidity and avoid the burden of immediate interest payments, especially in cases where the property is undergoing renovation or not yet generating income. Interest reserve accounts can be particularly beneficial for real estate investors or developers, allowing them to allocate funds towards property improvements or other investment opportunities while ensuring that interest payments are covered. By providing this financial cushion, interest reserve accounts enhance the feasibility and affordability of bridge loans, facilitating smoother real estate transactions and financial transitions for borrowers.

No prepayment penalties: Bridge loans without prepayment penalties offer borrowers additional flexibility and freedom in managing their loan obligations. With no prepayment penalties, borrowers can repay the loan in full before the end of the loan term without incurring additional fees or charges. This option is particularly advantageous for borrowers who anticipate selling their existing property or securing long-term financing sooner than expected. By avoiding prepayment penalties, borrowers have the opportunity to save money on interest expenses and potentially expedite the repayment process, allowing them to transition to their next financial goal or real estate transaction more quickly. Additionally, the absence of prepayment penalties reflects a lender’s confidence in the borrower’s ability to repay the loan and their commitment to providing borrower-friendly terms. Overall, types of loans without prepayment penalties empower borrowers with greater flexibility and control over their loan repayment, enhancing the overall borrower experience and facilitating smoother financial transitions.

Get Started Today 

Whether you’re a seasoned investor or a newcomer in the real estate scene, securing funding for investment projects can be a daunting task. That’s why our team at Express Capital Financing is here to support you every step of the way.

Leveraging our vast experience in real estate financing, we can provide customized bridge loan solutions tailored to your specific requirements. We understand that every investor’s vision is unique, and we’re committed to helping you turn that vision into reality.

Contact us today to explore your bridge loan options and take your real estate investment journey to the next level. 

FAQ

The credit score required to qualify for a bridge loan can vary depending on the lender and the specific loan program. Generally, bridge loan lenders may have more flexible eligibility criteria compared to traditional mortgage lenders, but a higher credit score typically improves your chances of approval and may help you secure more favorable loan terms.

While there is no specific minimum score universally required for credit approval, borrowers with credit scores in the "good" to "excellent" range (generally considered to be 670 or higher) may have an easier time qualifying for bridge financing and may be eligible for lower interest rates and fees.

That said, some lenders may consider borrowers with lower credit scores on a case-by-case basis, especially if they have strong compensating factors such as a significant amount of equity in their current property or a high income. Additionally, borrowers with lower credit scores may still qualify for bridge loans, but they may face higher interest rates and fees as a result.

The amount you can borrow on a bridge loan depends on several factors, including the lender's policies, your financial situation, the value of the properties involved, and the specific terms of the loan.

In general, bridge loan amounts can range from as low as $50,000 to several million dollars or more, depending on the lender's maximum loan limits and your qualifications. Typically, this type of loan is structured to cover a percentage of the combined value of the property being purchased and the borrower's existing property, often referred to as the "loan-to-value" (LTV) ratio.

Lenders typically offer bridge loans with LTV ratios ranging from 60% to 80% or higher, meaning they may lend up to 60% to 80% of the combined value of both properties. However, the actual LTV ratio and loan amount offered to you will depend on factors such as your creditworthiness, income, the appraised value of the properties, and the lender's risk tolerance.

Several costs are associated with bridge loans, which borrowers should consider when evaluating this financing option:

Interest Rates: Bridge loans typically carry higher interest rates compared to traditional mortgage loans. The interest rate may be fixed or variable, and it's often higher to compensate for the short-term nature and higher risk of the loan. 

Origination Fees: Lenders may charge origination fees to cover the administrative costs of processing the loan. Origination fees are typically calculated as a percentage of the loan amount and may range from 1% to 5% or more. 

Closing Costs: Borrowers may incur various closing costs when obtaining a bridge loan, similar to those associated with traditional mortgage loans. These costs can include appraisal fees, title insurance, attorney fees, and recording fees. 

 

Loan Servicing Fees: Some lenders may charge loan servicing fees to cover ongoing administrative expenses associated with managing the loan. These fees may be assessed monthly or annually and can vary depending on the lender. 

 

Extension Fees: If the borrower is unable to repay the bridge loan within the specified term and requires an extension, the lender may charge extension fees. These fees can add to the overall cost of borrowing and should be considered when evaluating the loan. Third-Party Fees: In addition to lender fees, borrowers may also incur third-party fees associated with the loan, such as property appraisal fees, title search fees, and escrow fees. These fees can vary depending on the complexity of the transaction and the bridge loan terms set by the lender.

To help with all of these questions and more, we've put together this handy guide on evaluating fix and flip properties.

Yes, there are several risks associated with bridge loans that borrowers should be aware of:

Higher Interest Rates and Fees: Bridge loans typically have higher interest rates and fees compared to traditional mortgage loans. The higher costs are due to the short-term nature of bridge loans and the increased risk to lenders.

Short-Term Nature: Bridge loans have short loan terms, usually ranging from a few months to one or two years. If the borrower is unable to sell their existing property or secure long-term financing to repay the bridge loan within the specified timeframe, they may face the risk of default or be required to seek an extension, which could result in additional costs and fees.

Market Fluctuations: Bridge loans expose borrowers to market fluctuations and uncertainties, including changes in property values, interest rates, and economic conditions. If property values decline or market conditions deteriorate during the term of the bridge loan, borrowers may face challenges in selling their existing property or securing long-term financing, potentially leading to financial losses.

Cash Flow Challenges: Bridge loans may require borrowers to make interest payments or incur other carrying costs during the loan term. If the borrower is unable to sell their existing property quickly or if unexpected expenses arise, they may experience cash flow challenges and difficulty meeting their financial obligations.

Default Risk: Like any loan, bridge loans carry the risk of default if the borrower is unable to repay the loan as agreed. If the borrower fails to sell their existing property or secure alternative financing to repay the bridge loan, the lender may foreclose on the property or pursue other legal remedies to recover their investment, which could result in the loss of the borrower's property or other assets.

Limited Availability: Bridge loans may not be widely available from all lenders and may be subject to stricter eligibility criteria than traditional mortgage loans. Borrowers may face challenges in qualifying for a bridge loan or may be limited in their options, particularly if they have less-than-perfect credit or the property does not meet certain criteria.

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