How to Qualify for a Bridge Loan: 9 Tips and 4 Fatal Errors

Private money lenders are usually individuals or small companies, allowing them to move much faster than traditional banks.

If possible, deal with a direct hard money lender to ensure the best rates and lowest fees.

During the due diligence process, lenders will factually check the provided information.

If they find discrepancies, falsified or misleading information, it could torpedo the deal. 

Simply put, be upfront about your financial situation and avoid surprising the lender with things that might make your deal not favourable.

Building trust with a lender will only increase your chances of funding approval. 

If things don’t add up and there is a lack of trust, qualifying will be nearly impossible. 

On the flip side, not all lenders can be trusted. To find out if someone is trying to pose as a lender and scam you, check our article on The Most Common Hard Money Scams.

Typical bridge loan durations are for 12 months. 

Before funding approval, lenders will want to know your exit strategy regarding how repayment will occur.

Failure to produce a clear and reasonable exit strategy will most likely result in funding denial.

Common repayment methods include selling the property, using outside funds, or refinancing into a bank loan. 

While private money lenders don’t require nearly as much documentation as banks, be prepared to produce proof of property ownership, recent financial statements, identification, a clear title, insurance, and a purchase contract if necessary.

Having this documentation organized and on hand helps to display professionalism and makes the lender's life easier; it’s a great first impression.

Think about it, lenders aren’t going to give disorganized and financially inept people millions of dollars; these are the types of borrowers who create issues. 

Additionally, documents showing strong income, other properties owned, or cash reserves demonstrate you are financially equipped to make the required monthly payments.

Consider this: in ancient Babylon, if a builder constructed a home that collapsed, resulting in someone's death, the builder could be put to death. 

This concept, known as strict liability, ensured accountability from builders to do things correctly. 

Hard money lenders use a similar mindset. While they won’t put you to death, they do expect you to have skin in the game. 

Borrowers are expected to share in the risk by contributing their own equity. 

Most bridge lenders will require borrowers to have a minimum of 25% equity in the property.

If a borrower has substantial property equity, for instance 40% or more, weaknesses in other required categories can be overlooked.

This accountability gives lenders confidence that you will treat the project seriously and helps protect lenders from a downturn in the real estate market.

Skin in the Game:

1. Reduces Moral Hazard - With money at stake, you will be more focused and prioritize the project.
2. Protects the Lender - If your project fails and the economy tanks, the strong borrower equity helps to ensure the lender will get their money back through foreclosure.
3. Indicates Financial Stability – Putting your own money down shows you are not leveraged to the max and you are not a major risk taker, this will increase lender’s confidence in you.

Have at least 25–30% equity in the property you are using as collateral; less than this, and your funding chances diminish.

Property location is another primary lending factor for bridge lenders.

Lenders are always thinking in terms of the worst-case scenario.

If you default on your debt obligations, foreclosure occurs, creating a long and arduous process for the lender to recoup its money.

Therefore, lenders want properties in major cities that are either currently generating cash flow or able to generate cash flow without much work, and that are easy to sell.

Properties are able to sell even if market conditions get rough.

Land and ground-up construction in rural areas are amongst the most difficult to obtain financing for, due to the many variables associated with a higher risk profile.

Consequently, finding a hard money loan for farm land in areas such as Bakersfield or Fresno can be challenging.

Most lenders view apartments and single-family residences as having the highest levels of liquidity, especially relative to an industrial laundromat that requires a specific type of buyer, hence shrinking the potential buyer pool.

Most lenders don’t require a borrower to be an experienced real estate professional, unless they are performing fix-n-flips or major renovations.

A renovation project can be littered with landmines, including delays, going over budget, and permit issues.

Due to these risks, lenders are more hesitant to lend money to someone who is not well-versed in construction.

If struggling to get funding, consider partnering with a seasoned real estate investor to increase chances of approval.

Many first-time borrowers have no issues receiving hard money loan approval. 

The importance of maintaining a strong relationship with your lender can’t be overstated.

Once you have completed a few successful transactions with a bridge lender and trust has been established, more favorable terms are likely on the horizon, potentially resulting in lower interest rates, higher loan amounts, and faster approvals.

1 - Lower Interest Rates - Past stellar performances show you are a proven commodity and therefore less risk to the lender

2 - Higher Loan Amounts - A proven track record builds confidence that you are a professional, making lenders more comfortable giving you larger amounts of capital.

3 - Faster Approvals - Streamlined underwriting, since your borrower profile is already known to the lender. 

Using a direct bridge lender can save you a substantial amount in fees and make the process more streamlined, as you are dealing directly with the decision maker and source of funding.

Depending on the loan amount, avoiding broker's fees could result in thousands, if not tens of thousands, of dollars staying in your pocket. Money that could otherwise be used for construction or other project-related costs. 

While your credit score is a secondary metric used by lenders and may not prevent you from getting funded, it could result in a higher interest rate, making borrowing more expensive. 

If your poor credit can be explained away, for example, you missed some phone bills or utility payments, hard money lenders will probably have mercy and not hold this against you.

Therefore, it’s important to communicate any blemishes on your record and to show your strengths as to why you will still be a solid borrower.