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What is a Hard Money Bridge Loan?
Hard money bridge loans provide short-term financing, usually ranging from 6 to 24 months.
They are designed to help borrowers acquire properties, fund renovations, and bridge funding gaps while securing long-term financing.
How Does a Hard Money Bridge Loan Work?
Let’s walk through the nine stages of how a borrower can secure a hard money bridge loan, from start to finish.
Inquiry
A borrower can find a direct bridge loan lender using:
- Real estate brokers
- Mortgage brokers
- Real estate lawyers
- Family & friends
To pre-qualify, the borrower will need to provide the following information:
- Property location
- Property condition
- Property type
- Purchase price and/or current property value
- Loan amount
- Use of funds
- Exit strategy
Based on the answers given and the level of risk, the bridge lender will decide whether to proceed with the loan request or not.
Application & Documentation
Once pre-qualified, the borrower will be asked to complete a loan application and provide supporting documents.
Required documents vary lender by lender, but here is a list of the most commonly asked for:
- Purchase contract
- Appraisal
- Recent comparable sales
- Renovation cost projections
- Cash reserves
- Driver’s license or passport
- Income
- Other properties owned
- Exit strategy
With these documents, the bridge lender is attempting to assess whether the borrower possesses sufficient financial strength, experience, and equity to fulfill their monthly debt obligations to the lender.
Term Sheet
If everything checks out, the lender will issue a non-binding preliminary term sheet outlining the proposed loan parameters, including:
- Loan amount
- Interest rates
- Origination fee
- Pre-payment penalties
- Underwriting fee
- Term length
- Loan extension options
- Rehab draws (if it is a fix-&-flip loan)
If the borrower agrees to the terms presented by the lender, they sign the term sheet, and the deal moves to the next stage.
Underwriting & Due Diligence
Once the borrower signs the term sheet, the bridge lender begins due diligence to determine the investment’s feasibility.
The lender will closely examine factors such as:
- Loan-to-value ratio
- Physical condition of the property
- The property’s current value
- Property title
- If title insurance is required
- Proof of insurance
- Borrower’s financial strength
- Borrower’s real estate experience
- Realistic exit strategy
- Interest rate
- Term length & possible extensions
Once the lender verifies all the information provided by the borrower, they will set a closing date.
Please note that knowingly fabricating or lying on a loan application constitutes loan fraud. If this occurs, the lender reserves the right to adjust the terms or decline the loan entirely.
Loan Approval
Once due diligence and underwriting are complete, the bridge lender will issue a final decision to approve or deny the loan.
If approved, the finalized terms will include:
- Interest rate
- Origination points
- Repayment structure
- Fees
Bridge loan lenders may ask for additional compensatory requirements, such as:
- Insurance coverage
- Escrow reserves
- Inspections
Once paperwork is finalized, the borrower can expect to receive funds within 2 to 3 days after approval.
Should the borrower back out, they can still walk away from the loan without incurring significant financial impact.
However, they will be responsible for costs such as appraisal fees, which are non-refundable.
Assuming the borrower proceeds with the transaction, the lender will notify the title and escrow company to prepare for closing.
Title & Escrow Insurance
The lender will hire a third-party title and escrow company to verify a clear title and confirm the property is free from any liens or judgments.
Closing Steps
- Escrow & Title prepares and organizes all closing documents.
- The borrower signs the deed of trust and the promissory note. In some cases, a personal guarantee may also be required.
- Lender wires the funds to escrow.
- Escrow disperses the funds to the borrower in accordance with the loan agreement.
Loan Servicing
After the borrower receives the funds, they are then responsible for making monthly interest payments until the loan is repaid.
Loan Repayment
Once the bridge loan lender has been repaid in full, they will take the lien off the collateral property.
Hard Money Loans vs Bridge Loans
Bridge Loans
Bridge loans are a type of short-term financing used by a borrower until they can refinance into a conventional mortgage or sell the property.
The most common use of a bridge loan is to purchase a new property before selling an existing one, or to obtain short-term funding between loans.
A bridge loan usually is a hard money loan, funded by hard money lenders, but that’s not always the case.
Large institutional banks can also fund bridge loans, and real estate is not always used as collateral.
Hard Money Loans
Hard money loans are short-duration loans commonly secured by real estate.
A hard money loan can be a bridge loan, but it can also be used for other purposes.
For example, hard money loans can also be used to fund:
- Fix-and-flip projects
- Distressed property purchase
- Cash-out refinances
- Foreclosure purchases
Pros and Cons of Hard Money Bridge Loans
Pros
Fast Funding
- Deals can be evaluated, underwritten, and funds released in as little as 5 to 7 days.
- Perfect for time-sensitive investment deals, including fix-and-flips, renovations, foreclosure auctions, and other hot-market opportunities.
Leverage
- Provides investors with financing for opportunities often unavailable through conventional banks.
- A property portfolio can be scaled with a small amount of capital.
- Lending criteria are based on property value & equity.
- The majority of lenders use a 60% to 70% loan-to-value (LTV).
Flexible Deals
- Can be used to fund many property types, including residential, commercial, distressed, and rental properties.
- Poor credit, irregular income, or unconventional financial histories from the borrower are not deal-breakers.
- Interest-only loans
- Rehab draws (if needed)
- Tailored terms
Cons
Higher Costs
- Higher interest rates, often 8% to 12%
- Origination fees, ranging from 1% to 4%
- Underwriting fee of $1k to $2k
Lenders Can Be Picky
- Most lenders are hesitant to finance land, rural properties, or ground-up construction projects.
- Experienced borrowers are preferred.
- Borrowers must have skin in the game; adequate equity is essential.
- Low-equity properties equal a higher probability of being declined.
Other Risks
- Short-term duration loans can lead to refinancing pressure if project delays occur.
- Foreclosure risk if the borrower defaults, as lenders can act quickly.
Remember, if problems arise with your hard money loan, maintaining honest and clear communication with your lender is crucial to finding a solution.
Hard Money Bridge Loan Fees
Bridge loan fees often work on a sliding scale. It’s common for smaller loan amounts to carry a higher fee percentage, while larger loan amounts have a lower percentage.
This is due to the fixed costs associated with bridge loans, such as underwriting and legal expenses.
Bridge loan fees for smaller loans, around $500,000, are usually 3% to 4%.
For loans in the low millions, the rate can be reduced to 1% to 2.5%.
And for loans in the high millions, a borrower may pay 1% to 2%, depending on the lender.
Please note that these numbers can vary significantly, particularly when brokers are involved.
Brokers will typically look to add 1% to 2% on top of the hard money lender's fees, which can significantly increase the overall cost.
A borrower’s best bet is to find a direct bridge lender to get the best possible pricing on fees.
Some lenders require a minimum loan amount of a few hundred thousand dollars, while others put a cap on the amount they are willing to fund, helping to diversify their risk exposure to any single loan.
Lastly, keep in mind that if you secure a bridge loan for 12 months, once the loan comes due, the lender will either ask for the funds to be returned or may offer you an extension, which will most likely require additional fees.
Therefore, it is in the borrower’s best interest to negotiate a potential option for an additional 12 months if circumstances don’t go as planned.
The lender may agree to a reduced fee for the additional 12-month period; however, it is advisable to negotiate this in advance.
Handpicked Resources
Bridge Loans Guide Bridge Loans
Multifamily Bridge Loans Bridge Loans
How Long Does It Take? Bridge Loans
Commercial Bridge Loans Bridge Loans
Bridge Loan Rates & Fees Bridge Loans
Residential Bridge Loans in California
About the Author
Russell Barneson Hard Money Lending
Russell is a seasoned real estate investor, writer, and hard money lending strategist, as well as the co-founder of Crescent Lenders. He holds a degree from the University of Southern California’s Marshall School of Business. Outside of work, Russell enjoys surfing and spending time outdoors with his dog, Amy.