Frequently Asked Questions: Commercial Mortgage Bridge Loans

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In a carefully planned manner, investors effectively used by investors for acquiring properties swiftly, using the loan as a stop-gap arrangement. One of the easiest to access options for quicky liquidity is that bridge loans are typically regarded as bittersweet options – easy access and high interest. However, despite perceptions, bridge loans continue to be one of the best short-term finance options.

One of the reasons for the perception is the lack of knowledge about commercial mortgage bridge loans. Here is a compilation of frequently asked questions to help the reader understand bridge loans better, which will help eventually decide the suitability of availing one.

Q1 – Common eligibility criteria for availing bridge loans?

While the eligibility criteria may entirely depend on the lender’s discretion regarding specific requirements, there are certain standard criteria followed by lenders. For instance, the credit score requirements are generally the same among all lenders. Another non-negotiable aspect is the collateral required for the loan.

The lien is of utmost importance and is the security that protects the interests of the lender. Hence, lenders assess the property’s value, both in terms of the present value and the projected future value.

The borrower/property’s income-generating ability is taken into consideration, as that will ensure that the borrower is in a position to clear the debt as per agreed terms.

Q2 – What are the typical scenarios for availing bridge loans?

Typical scenarios for availing bridge loans include situations where there is an urgent need for liquidity. For instance, a property that has been finalized for purchase but the intended buyer is short of funds and expects funds shortly.

The property may be the ideal one, and the fund’s inflow may be expected in a short period. By availing a bridge loan, the prospective buyer can quickly take possession of the property and repay it on receipt of funds.

Other typical scenarios include situations when a prospective buyer may intend to dispose of existing property and use the sale proceeds to purchase a new property. However, the stuff that is up for sale may not have yet received a reasonable offer, or the deal’s closure, maybe a few months away.

The buyer may then have to raise funds as a stop-gap arrangement to purchase the property and wait for the funds from the old property’s sale to clear the loan. A commercial mortgage bridge loan is mot suitable in this scenario, as the new property acquisition will proceed smoothly.

In the concluding stages, a project may witness a funds crunch, with the eventual sale depending on completion speed. In such scenarios, other loan options may delay completing the project, with bridge loans remaining as the best option for bridging the gap.

Renovations, extensions, and improvements to properties are other scenarios where bridge loans are effective options. The value of a property can be incrementally or substantially increased with suitable renovations and extensions. Bridge loans help meet these financial requirements easily and allow the investor to quickly monetize the investments and clear debts.

Q3 – Can a bridge loan term be extended?

No. Bridge loans are short term loans with the maximum period typically capped at 18 months. Most investors plan to repay the loan in a shorter period and never plan to extend a bridge loan.

Q4 – Can refinance be used as a way to meet the repayment of bridge loans?

Refinancing is a possible way of meeting the repayment schedule of bridge loans. Due to the short tenure of the bridge loans and the relatively higher interest rates, the best way to exit a bridge loan is to avail refinancing. However, most investors and developers look at bridge loans only when options are at hand to repay the bridge loans before the end of tenure. Refinancing can be considered when the fund inflow is not on expected timelines.

Q5 – What is the single most significant risk associated with bridge loans?

Investors who have worked out proper plans for raising funds within the end of the term of bridge loans are not at any risk. However, investors who avail bridge loans and are unable to make the repayment are exposed to the risk of losing the collateral. Apart from the relatively higher interest rates, which are justified due to the speed and nature of the loan, the main risk is the collateral’s possible loss if the borrower cannot raise funds and repay.

Q6 – Are there foreclosure charges involved in bridge loans?

Bridge loan repayment does not have foreclosure charges, and borrowers can make the repayment earlier than decided or agreed. Unless specifically mentioned, there are no foreclosure charges involved in bridge loans.

Q7 – How long does it take for a bridge loan to be sanctioned and funds disbursed?

It typically takes anywhere between three to five weeks to disburse the bridge loan amount from applying for one. This depends on the size of the loan and the various parameters associated with the loan.   

Q8 – How is the loan amount calculated by lenders?

The calculations used to determine the loan amounts are combining the loan-to-cost ratio and the loan-to-value ratio. The former is assessed based on acquiring the property and the costs (if any) towards the renovation. The loan value consideration based on LTC is typically capped at not more than 80% of the charges, as listed above. The loan to value ratio is also generally capped at 80% of the property’s assessed finished value.

Q9 – Are bridge loans sanctioned despite low credit rating?

Yes, bridge loans are also sanctioned for borrowers with lower credit ratings. The pre-requisites for borrowers with lower credit ratings include the right collateral to prove that the lender has a lien to cover the bridge loan extended to the borrower. Additionally, it is also necessary for a borrower to show credible proof of ability to repay the loan on time. These two pre-conditions will make a borrower with a lower credit score eligible for a bridge loan.

Q10 – Is it necessary to furnish income proof for commercial bridge loans?

Borrowers don’t need to show proof of income for commercial bridge loans. However, it would help prove that the borrower has a credible source of funds for repaying the loan amount. The mandatory requirement is a clear exit strategy – a plan that shows how the amount will be refunded. Lenders extend bridge loans only when there is a clear plan of repayment.

Q11 – Are bridge loans intended only for specific purposes?

Bridge loans for real estate are extended for all categories of properties. This includes commercial, residential, and plots.

Q12 – What is the typical credit score required for commercial bridge loans?

The typical, desirable credit score for commercial bridge loans is 650+. While it is true that the desirable credit score helps in availing the loan quickly, lenders also extend loans for borrowers with lesser than desired credit scores, subject to other conditions, as explained above.

Q13 – Are mortgaged properties eligible for bridge loans?

Mortgaged properties are eligible for bridge loans, and depending on the equity, bridge loans can be extended as a third charge. However, lenders will sufficiently satisfy themselves about the charge and the ability to protect their interests in the event of non-repayment of the loan amount, before extending a bridge loan on a third charge.

Q14 – What are the costs involved in availing bridge loans?

The ballpark for costs involved in providing bridge loans includes – origination fees between 1 to 6 percent, with interest rates typically between 6 to 10 percent. The amortization is interest repayment only until full repayment, closing costs between 2 to 4 percent of the loan amount.

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