When Should a Commercial Real Estate Bridge Loan be Used?

Learn how to double your income on financing your borrower’s purchases and have your borrower thanking you all the way to the bank. All it takes is understanding how to sell the power of bridge loans to increase your borrower’s return. 

Educating your borrowers on how to achieve real estate wealth is key to closing more loans, and this approach permits you to move beyond quoting rates and fees. The bridge loan value add method increases returns for your borrower and enables you to close two loans where you only closed one. As an extra benefit, the freed-up capital enables your borrower to return to the purchase table much quicker, with another loan for you to fund. 

Defining a Commercial Bridge Loan

Commercial bridge loans are a temporary, short-term financing option that is usually made by private alternative lenders who specialize in helping real estate investors.

These types of loans help a real estate investor cover part of the cost of acquiring a new commercial property and entice a seller with a quick close. Commercial Bridge Loan Financing can also be used to pull cash out of a property to pay off an existing loan, settle other debt obligations, or even purchase more properties. These loans can be used on many commercial property types.

The Difference Between a Commercial Bridge Loan and a Traditional Loan

Speed of Closing

Waiting for a traditional loan to be processed and approved can take months, especially with how long the required traditional appraisal can take. However, a commercial bridge loan can close within three weeks. This allows an investor to move quickly when time is of the essence, then arrange permanent financing after the bridge loan closes.

Loan Approval

Qualifying for a commercial bridge loan is usually easier than qualifying for a long-term loan. Private non-bank bridge lenders can consider lower credit score minimums, may not consider global debt-to-income ratio (DTI), can accept a borrower's shorter track record, may not require seasoning of funds, and can be more flexible on other requirements. Property requirements are also more flexible including vacancy, deferred maintenance, low DSCR (debt-service coverage ratio), or even location in a tertiary market.

Fees and Interest

The faster loan close and easier qualification of a bridge loan comes with higher fees and interest rates. However, it's important to consider the higher cost against the potential profit to be made on a property. No one likes to pay more, but smart investors have always considered the overall return on a deal versus perhaps not being able to do it at all.

Loan Uses

Traditional lenders prefer to finance a property after the renovation is done and the property is leased up and stabilized. Commercial real estate bridge mortgage lenders are far more flexible with how the bridge loan is used, especially when it comes to cash-out refinances. Investors can turn to a bridge lender for no-seasoning cash-out refinance based on a value above the purchase price. 

Prepayment Penalties

Traditional commercial real estate mortgages can have some serious prepayment penalties. Bridge loans normally have no or a very minimal prepayment penalty, with the most common being a minimal amount of months of interest paid. On a 12-month loan, expect three months of interest as the minimum. This means if the loan is paid off in 10-weeks the minimal interest would be pro-rated for the remaining two weeks of the full three months.

Loan Term

The typical commercial property bridge loan has a term of 6-24 months, with smaller loans under $2 million at 12-months or less. Many commercial bridge loan lenders will have an option to extend the loan if needed for three-months to one year.

Conventional long-term loans are often the best source of low-cost capital, but not the best commercial real estate loan choice for every situation. Short-term bridge loans provided by private lenders are the alternative form of financing used to raise capital quickly or flexibly, with loan terms that match better to value-add opportunities. 

There are many commercial bridge loan lenders and each has a focus on what they like as well as specific underwriting requirements. A quality commercial mortgage broker will be able to guide an investor to the lender that matches the borrowing situation, and in the case of a bridge loan, can advise and work with a borrower on a business plan for a successful exit to long term financing.