Bridge loans help real estate investors with gaps in financing. Learn the types of bridge loans, why they're used, alternatives, & if they're right for you.

Real estate transactions, including many types of investments, often have transitional periods when a buyer or investor is waiting for money to come in. This could be long-term financing or other forms of cash flow. During this period, they might need short-term financing to cover expenses, pay for a real estate purchase, or provide working capital for other purposes. A bridge loan can meet this need. Read on to learn more about how bridge loans work, different types of bridge loans, and whether a bridge loan might be a good idea for you.

What are bridge loans?

Bridge loan definition: a financing option that allows you to make a purchase quickly while you seek long-term financing from another source. Alternatively, bridge loans may be used without expectation of longer-term financing, as is the case for short-term projects like a fix and flip.

Bridge loans explained

The big idea: Homebuyers, real estate investors, and businesses use bridge loans to meet temporary financial needs. They generally have a short-term plan for how to pay the loan off. A real estate developer, for example, might use a bridge loan to cover operating expenses while they wait to close on a 20-year loan. A real estate investor can use a bridge loan to pay for renovations or repairs to a property before selling it.

How they help: This type of loan can help when sudden or unexpected transitions are necessary. A homeowner might find the home of their dreams while trying to sell their current home. A bridge loan can help them buy their dream home. They can use the proceeds from the eventual sale of the old home to pay off the bridge loan. This is a common example of how non-investors use bridge loans.

What lenders look for: Bridge loans often allow more room for flexibility – both in terms of qualification requirements and loan terms – than other types of financing. Some lenders will consider factors like credit history, debt-to-income ratio (DTI), and even income when deciding whether to approve a bridge loan application. Hard money lenders will focus on the value of the underlying property. Every lender will want a written plan for your repayment of a bridge loan.

How long are bridge loan terms?

Bridge loans are short-term by their nature. Terms of 6 months to 1 year are common. Many bridge lenders offer interest-only payments to help borrowers pay the very minimum until they find long-term financing (or until the property is sold).

Types of bridge loans

Photo by Patrick Feller on Flickr [Creative Commons]

Bridge loans are used for various purposes. Common types include the following:

Residential bridge loans: Homeowners get bridge loans in order to use equity in the current home as the down payment for a new one. Example: you live in a competitive market where homes sell quickly. You find the perfect home before you sell your current one. This is a problem because you’re depending on the sale of your current home to make the down payment on your next one. With a bridge loan, it’s possible to buy the new home without having sold your current one first. The bridge lender allows you to use the equity you’ve built in your current home as a loan for a down payment for a new home.

IMPORTANT: Do not seek bridge financing for your next primary residence without first consulting with lenders offering longer-term financing (assuming you need it). Using a loan to generate a down payment may disqualify you from longer-term financing if it increases your debt to an unacceptable level.

Bridge loans for new construction: Builders and developers can use bridge loans for overhead, operating expenses, and other costs until permanent financing becomes available.
Commercial bridge loans: Businesses might use bridge loans to cover expenses while they wait for longer-term financing, such as an upcoming investment round.

Alternatives to bridge financing

Other types of loans that can serve the same function as a bridge loan:

Home equity loan: Homeowners may be able to borrow against the equity in their current home to finance the purchase of a new home.
Home equity line of credit (HELOC): This is similar to a home equity loan, but the homeowner can borrow against their equity gradually.
Personal loan: An individual can take out an unsecured loan from a bank or credit union.
Other secured loan: Individuals might be able to borrow against the value of other assets, such as stocks or 401(k) plans. Businesses can borrow against the value of business assets.
Commercial loan: These are unsecured loans issued to businesses, and not strictly for purchasing real estate.
Business line of credit: Banks or credit unions may grant lines of credit to businesses.
Refurbishment/renovation loan: This type of loan allows real estate investors to pay for property repairs or renovations. Examples include FHA 203(K) and Homestyle Renovation loans. However, these come with restrictions on what you can use the money for, and may cap at a lower loan amount than a private lender would offer you.\

Peer-to-peer lending: This is a fairly new type of financing in which an online portal connects borrowers and lenders.
Angel investor: Angel investors are individuals who invest their own money, typically in exchange for partial ownership of your business. They may want an active role in your day-to-day business operations and decisions. This form of financing is most common among business startups, but it could also help real estate investors in some situations.
Help from friends and family: Getting friends and family can become messy if there aren’t strict guidelines agreed to. However, there are obvious upsides.

Who offers bridge loans?

Photo by Dhruvaraj S on Wikimedia Commons [Creative Commons]

Bridge loans may be available from a wide range of sources, depending on the purpose of the loan.

SBA Express bridge loans

The U.S. Small Business Administration (SBA) introduced a pilot program providing Express Bridge Loans (EBLs) of up to $25,000 to qualifying businesses in certain situations. It mainly applies to areas with disaster declarations, including public health emergencies related to the COVID-19 pandemic. The program provides short-term financing until permanent financing is available.

EBLs are geared more toward buyers looking for a primary residence than to investors. Investors will likely need a higher loan amount than what the SBA provides with this program.

Private lenders

Private lenders are the most popular source of bridge loans. These lenders define their own terms and have a more personal touch than big banks. They’re experienced in closing loans very quickly – sometimes in as fast as seven days. They also remove hurdles to qualifying for a loan, especially compared to big banks and government-backed mortgage programs.

Which banks offer bridge loans?

Most banks and credit unions offer bridge loans for various purposes. Criteria for loans may vary from one area and one bank to another.

What are the pros and cons of bridge loans?

Like any form of financing, bridge loans offer advantages and disadvantages. The pros of bridge loans may include the following:

Flexibility
Access to cash flow
Faster approvals and closing than any other kind of real estate loan

There are cons, too:

Higher interest rates
Additional expenses if a borrower already has an outstanding loan
They may require past experience to qualify, especially for higher loan amounts
They lack the backing of a huge bank or government program. If your private lender’s business goes under, your project may go down with it.

Costs associated with bridge loans

Taking out a bridge loan might involve closing costs, depending on the lender. Bridge loan interest rates are likely to be the biggest expense. A down payment of around 20% if often required. Since bridge loans tend to carry higher risk for lenders since the qualification requirements are not as stringent. Therefore, rates are higher than longer-term financing.

Is a bridge loan a good idea for you?

Bridge loans are a good idea in many situations, but they aren’t for everybody. The ideal scenario for a bridge loan is when you need cash flow and are certain that funding will be coming from another source in the relatively near future, typically within six to twenty-four months. Otherwise, you could find yourself needing even more financing to repay the bridge loan.

A reputable bridge lender will help assess if they’re a good fit. They also have a stake in your ability to repay it.

Apply for a bridge loan with Capstone Capital Partners!

The hard money lenders at Capstone Capital Partners provide real estate investors with residential and commercial bridge loans in Texas and beyond. We’ve built our business with one relationship at a time. Our team has closed a combined $500M+ in real estate loans through our careers. Our borrowers often remain as repeat clients, for one smooth project after another.

We’d love to get to know you and your next project. Expect to hear from us within one business day – and close within seven days with an appraisal in hand! Your first step is to answer some basic information with our easy online questionnaire.

Start Your Pre-Approval

A Simple Run-Down on How Bridge Loans Work