Have you ever found the perfect property but didn’t have the funds to close the deal? That’s where a short-term bridge loan can save the day. They’re designed to “bridge” the gap between when you enter and exit a real estate deal with minimal hassle.
ABL offers fast, flexible bridge loans for real estate investments nationwide. Whether you’re looking to buy a property to fix and flip or build from the ground up, our bridge loans can provide the short-term financing you need to focus on the work.
What Is a Short-Term Bridge Loan?
A short-term bridge loan is a temporary loan for financing real estate investments.
For example, a bridge loan can help you buy a distressed property to repair and sell for a profit. Alternatively, it can help you finance a new construction project or buy a property while you arrange for long-term permanent financing.
What all bridge loans have in common is their relatively short loan term (usually 12-24 months), compared to conventional long-term mortgages of up to 30 years.
How Short-Term Bridge Loans Work
When you get a bridge loan, you secure the loan with real estate, typically the property being financed. That means if you default, the lender can seize the property to recoup their losses.
Once the loan term begins, you’ll start making payments. However, these are typically interest-only, meaning you aren’t required to repay any principal until the loan is due. At that point, you must repay the loan balance with a lump sum. To do this, most investors use the sale proceeds from reselling the property or the equity from a cash-out refinance.
Example Bridge Loan Scenario
Let’s say you find a property for $250,000. A short-term bridge loan from ABL could cover up to 65% of the loan-to-value (LTV), or $162,500 in this case, and close in as few as 30 days.
From there, you’ll make interest-only payments and won’t have to pay off the loan for 12-24 months. This gives you time to flip the property, turn it into a long-term rental, or do something else with the money.
How to Qualify for Short-Term Bridge Loans
To qualify for a short-term bridge loan, you must meet the lender’s minimum requirements and agree to their loan terms. Here’s what to expect:
Common Loan Requirements
- Credit score. Most bridge loan lenders require a minimum credit score. At ABL, it’s 660.
- Loan size. A minimum and maximum loan size is also common. ABL issues bridge loans for anywhere from $75K to $50M.
- Loan term. Though bridge loans are short-term by definition, lenders vary in what they allow. ABL offers bridge loans for anywhere from 12 to 24 months.
- Property type. Lenders may restrict bridge loans to certain property types. At ABL, we’ll finance the purchase of single-family, multifamily, and condo properties.
- Loan-to-value (LTV). LTV is how much the lender is willing to lend as a percentage of the collateral’s value. For example, ABL bridge loans can finance up to 65% of LTV.
Common Loan Terms
- Collateral. You’ll need to offer real estate (usually the property being financed) as collateral on the loan.
- Interest rate. Interest rates vary by lender and market. ABL bridge loans come with rates between 11% and 15%.
- Origination fees. Origination fees (aka points) are an upfront charge lenders collect to process and fund a loan. At ABL, we offer bridge loans for as few as 0 points.
- Repayment structure. Bridge loan repayments can be structured in different ways. At ABL, we offer interest-only payments to maximize your cash flow during the loan term.
- Prepayment penalty. Some lenders charge a prepayment penalty if you pay off the loan early. But not ABL. We want to reward you for finishing early by letting you keep the interest cost savings.
Pros and Cons of Short-Term Bridge Loans
Of course, short-term bridge loans aren’t for everybody. Consider the pros and cons:
Pros of Short-Term Bridge Loans
- Fast approval and funding. For example, ABL can pre-qualify you within 24 hours and close on loans in as few as 10 days.
- Flexible lending criteria. Compared to conventional mortgages, bridge loans tend to be more flexible on loan terms, including repayment structures and loan size.
- Ideal for investors. Bridge loans are ideal for fix-and-flip or new construction projects where you only need capital for a short period before exiting the deal.
Cons of Short-Term Bridge Loans
- Higher interest rates. Compared to long-term mortgages, bridge loans tend to have higher interest rates.
- Shorter repayment window. One to two years is a short window, requiring borrowers to have a solid exit plan.
- Not suitable for long-term investors. Bridge loans aren’t for buy-and-hold investors, who would do better with a DSCR rental loan.
Common Mistakes to Avoid
To get the most out of your next bridge loan, avoid these common mistakes:
Underestimating Timelines and Costs
Be conservative in your estimates. Construction delays and cost overruns are common in the industry, and if you don’t plan some extra time and budget for the unexpected, you may end up in a tough situation.
Failing to Have Clear Exit Plans
Know your project’s end from its beginning. Ideally, you’ll have multiple ways to exit the deal to avoid getting stuck with a loan you can’t repay. For example, you could plan to resell the property to pay off the loan. But if that doesn’t work, explore other options like refinancing.
Not Choosing a Reliable Lender
It may be tempting to go with the cheapest bridge loan lender or the first one you come across. However, it’s important to carefully vet lenders before choosing one. Otherwise, you may end up with poor service and regret your decision.
Partner with a Trusted Bridge Loan Lender
ABL has been issuing bridge loans to investors since 2010. Our deep experience and strong track record across markets nationwide make us an ideal lending partner. To see if you qualify, fill out our no-commitment pre-qualification form. We’ll get back to you within 24 hours.