Hard Money Bridge Loans
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Hard money bridge loans provide short-term financing, usually ranging from 6 to 24 months.
They are intended to help borrowers acquire properties, fund renovations, and or cover gaps in funding while securing long-term financing.
Bridge loans are a form of temporary 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 in real estate, where it is often used 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 is not always the case.
Bridge loans can also be funded by large institutional banks and they not always secured by a hard real estate asset.
Hard money loans are short-duration loans secured by real estate.
A hard money loan can be a bridge loan, but it can also be many other things.
For example, hard money loans can also be used to fund:
Here, we will go through a 9-step process that describes, from start to finish, how a borrower can obtain a hard money bridge loan.
A borrower can find a direct hard money lender using:
To pre-qualify, the borrower will need to provide the following information:
Based on the answers given and the level of risk, the bridge loan lender will decide whether to proceed with the loan request or not.
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:
Lenders want to hear a clear exit strategy outlining how they will be repaid, whether through the sale of the property or the borrower refinancing into a conventional bank loan.
The bridge loan lender is attempting to assess whether the borrower possesses sufficient financial strength, experience, and equity to fulfill their monthly debt obligations to the lender.
If everything checks out, the lender will send the borrower a non-binding preliminary term sheet, outlining the parameters of the loan:
If the borrower agrees to the terms presented by the lender, they sign the term sheet, and the deal moves to the next phase of the process.
With the due diligence and underwriting steps in the process finalized, the bridge loan lender either green-lights the loan or denies it.
In this final step, the terms are finalized, including:
Bridge loan lenders may ask for additional conditions for borrowers to comply with, such as:
If all paperwork is in order, the borrower can expect to receive the funds within 2 to 3 days after the hard money loan has been approved.
If the borrower gets cold feet, they still have the opportunity to walk away from the loan without incurring much economic pain.
However, they will be on the hook for costs like appraisal fees that are non-refundable.
Assuming the borrower proceeds forward with the transaction, the lender will inform the title and escrow to prepare for closing.
Once the borrower signs the term sheet, the bridge loan lender will initiate its due diligence on the loan to determine if the investment is viable and whether the borrower can realistically repay the loan.
The lender will examine closely factors such as:
Keep in mind that if a borrower knowingly fabricates or lies on the loan application, they will be committing loan fraud, and the lender may alter the terms or decline the loan.
Once the lender verifies all the information provided by the borrower, they will proceed to the next step and set a closing date.
The lender will hire a third-party title company to verify a clean title and that the property is free of any liens or judgments.
After the borrower receives the funds, they are then responsible for making monthly interest-only payments until the loan is repaid.
Once the bridge loan lender has been repaid in full, they will take the lien off of the collateral property.
Overall, if issues arise during your hard money loan, it’s best to communicate honestly and clearly with your lender to explore available solutions.
It’s normal in the industry for smaller bridge loans to have higher fees, while larger loan amounts will pay a lower percentage fee.
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%, while loans in the low millions could be anywhere from 1% to 3% and loans into the high millions, a borrower might pay 1% to 2%, depending on the lender.
Keep in mind that these numbers can vary significantly, especially when brokers are involved.
A borrower’s best bet is to find a direct hard money lender to get the best possible pricing on fees.
Some lenders will have a minimum amount of a few hundred thousand dollars to make the loan worth their while, and other lenders will put a cap on the amount possible to fund to help diversify risk exposure to any one loan.
Lastly, keep in mind that if you secure a bridge loan for 12 months, once that loan comes due, the lender will either ask for the funds to be returned or they might offer you an extension, which most likely will 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.
It’s possible the lender will agree to a reduced fee for the additional 12-month period, but you should always negotiate that in advance.
Russell is a seasoned real estate investor, writer, and hard money lending expert, 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.