If you’re interested in applying for a bridge loan to buy or renovate a commercial property, you may be wondering if taking on that debt could cause your credit score to drop.
We’ll clear up where the credit risk really comes from in this blog.
Will my personal credit score be affected if I use a bridge loan to fund a commercial real estate investment?
Not by itself. The loan only becomes a credit issue if something goes wrong.
The borrowing itself is “neutral.” On its own, taking out a bridging loan to buy and/or renovate a commercial property will not damage your credit score. What might affect your credit score is how you manage that loan.
There might be a temporary dip
Applying for a bridge loan (or any other loan) will temporarily lower your score.
That’s because when you apply for a loan, you have to sign a form authorizing the lender to pull your credit report.
The moment the lender uses your SSN to look up your personal credit history, the credit bureau automatically creates an official record of that check on your file.
That official record is called a hard inquiry/hard pull.
This will temporarily knock a few points (usually 3 to 5 points) off your personal credit score.
After that, the effect usually fades over the next few months.
The inquiry can remain on your credit report for up to two years, but FICO only considers inquiries from the previous 12 months.
This is completely normal for any loan, not just bridge loans.
Will defaulting on a bridge loan still affect my personal credit score if the loan is under an LLC?
Yes, doing this can still affect your personal credit score, albeit indirectly.
An LLC is a separate legal entity and should, in theory, keep the company’s debt separate from your own. But in reality, most commercial real estate bridge lenders won’t lend to a standalone LLC; they will tie the bridge loan back to you personally.
You will often be required to provide a personal guarantee, unless you are securing a non-recourse loan (which is rare for smaller bridge loans or smaller LLCs).
This makes you personally liable if the LLC defaults.
Now, most commercial bridge loans are not reported to consumer credit bureaus on a monthly basis, so the loan will generally not show up on your personal credit report, and your monthly payments won’t build or hurt your personal score.
But if your project fails and your LLC defaults, the lender will enforce the personal guarantee, meaning they can sue you personally, obtain a court judgment, ruin your credit via collections, and/or foreclose on the property — all of which will destroy your personal credit score.
Read More: Bridge Loan Explained
How do I make sure that my credit score is not affected by my commercial property bridge loan?
The best protection is to prevent a default, which means managing the project’s liquidity and making sure that your exit strategy is executable within the time available.
Here are the primary strategies that experienced CRE investors use to make sure that the debt gets paid on time and protect not only their investment but also their personal credit score:
1. Establish a solid plan to reach your takeout, with room for setbacks.
Bridge loans are meant to temporarily carry you to somewhere more permanent, so you need to make sure that this ‘somewhere’ is reachable within the loan term.
Refinancing into long-term debt – Do you plan on converting your bridge loan into a 10-to-30-year permanent loan once renovations/stabilization are complete?
Find out what underwriting criteria (DSCR, occupancy, debt yield, etc.) will be required by the bank or permanent lender that you intend to transition to.
The last thing you want is to spend a year stabilizing the property only to find that they won’t approve the refinance.
Selling the property – Always have an off-ramp to sell the asset if refinancing markets dry up or interest rates spike.
2. Negotiate built-in extension options with the bridge loan lender.
Don’t accept a bridge loan with a hard maturity date that has no flexibility.
Ask the lender for extension clauses. You may be able to negotiate standard 12-month extension options such as a 2+1+1 (2-year base loan with two 12-month extensions).
Of course, you need to understand the conditions of this extension.
Lenders usually grant extensions only if:
- You pay an extension fee (typically 0.25% to 0.50% of the loan balance)
- The loan is not currently in default
- The property meets a minimum Debt Service Coverage Ratio (DSCR) or debt yield target.
3. Set up a fully-funded interest reserve.
One of the leading causes of bridge loan defaults is running out of cash flow to pay the monthly interest payments while the property is under renovation or is still vacant.
This is why it’s prudent to hold back 6 to 12 months’ worth of interest payments in an escrow account managed by the lender.
You don’t necessarily have to bring fresh cash out of your own bank account to set up the interest safety cushion.
The lender could add that money onto your total debt balance and place it directly into the reserve account.
4. Underwrite with a buffer for delays and rates.
CRE projects almost always take longer and cost more than planned, so it just makes sense to build conservative cushions into your financial model.
Budget for 9 to 12 months if your contractor says renovations will take 6 months.
If your bridge loan has a variable interest rate, purchase an interest rate cap (insurance against rising rates) or stress-test your numbers assuming interest rates rise by 2% to 3%.
5. Maintain liquidity.
Keep cash reserves outside of the deal’s budget to cover unexpected capital expenditures, because they will come up.
There will inevitably be cost overruns somewhere in the project and/or tenant vacancies could last longer than expected.
This is why bridge loan lenders often want to see at least 6 to 12 months of principal and interest payments in liquid post-closing reserves.
6. If your exit is no longer on schedule, communicate early with your lender.
Bridge lenders generally don’t want to foreclose and own/manage the property themselves if they can avoid it.
If you realize before maturity that you won’t meet your deadline or debt yield target, reach out immediately.
Private Commercial Lenders are much more willing to grant loan modifications before the loan is in default.
You can also negotiate temporary forbearance or informal extensions if you present a clear updated business plan well before the loan matures.
