Bridge loans are fast, but that speed can also invite mistakes on your application, and those mistakes will ironically cause the exact problems you are trying to avoid: they will delay closing or even cause your application to be rejected entirely.
In this blog, we break down how to use a bridge loan without making those expensive errors.
Mistake #1: Treating bridge loans like regular amortizing loans
In traditional loans, you pay down principal with each monthly payment.
But in a bridge loan, your monthly payments don’t reduce what you owe: you’re only paying off the interest every month.
None of the monthly payment goes to the principal. Be sure to have your refinance or sale strategy worked out before closing.
Mistake #2: Not accounting for the total cost of the bridge loan
Sometimes, in a rush to close on a property, bridge loan borrowers ignore the extra fees that come with the loan:
- Origination/arrangement fees
- Valuation/appraisal fees
- Legal and title costs
- Admin/processing fees
Do note that there will also often be penalties for paying a bridge loan off too early.
Ask for a full fee schedule before you sign and build every fee and possible penalty into your financing budget.
Mistake #3: Having a weak/unworkable exit strategy
Did you know that even if you have an 800 credit score and a valuable property, lenders will be reluctant to greenlight your application if you don’t have a concrete plan for paying off that final lump sum?
You need to be ready to show your strategy:
- If you’re refinancing – You must already be in talks with a permanent lender who can confirm that they will cover the payoff when the bridge loan ends.
- If you’re selling – Show hard evidence that there is enough buyer demand in the locality to sell fast enough before your loan is due.
Mistake #4: Underestimating delays
Delays are guaranteed in commercial real estate: not just construction but also permitting and refinancing.
If your loan term ends and you’re not ready to repay, you might need to pay extension penalty fees or even lose the property.
Things will take longer than you think, so buy yourself extra time when choosing your loan term.
Always add a safety buffer.
If you think you need 6 months, take a 9- or 12-month loan. It still comes out much cheaper to pay a few extra months of interest for peace of mind.
Mistake #5: Offering weak collateral
Bridge loans asset-backed: the lender relies on the property you’re using as collateral, so if that collateral isn’t appropriately valued or is not in your legal possession, you won’t get approved.
Be prepared to show proof of ownership and documentation that the asset is free of problematic liens and legal disputes.
Your bridge loan lender will likely require title insurance and a thorough review of the deed. Have these ready to keep the application process seamless.
Mistake #6: Looking at bridge loans as ‘emergency’ funding
Investors new to CRE often think of bridge loans as the absolute last resort for “hopeless” deals that are already knee-deep in trouble.
These loans are actually powerful financing tools for proactive investors.
Are you looking to purchase property at auction while waiting for the SBA to approve your loan?
Do you want to leverage the equity you’ve built up in one project to fund another?
You can use a bridge loan strategically to do exactly those.
Mistake #7: Applying without preparing documentation
Documentation is still very important in bridge loans, even if lenders in this segment generally ask for much less paperwork than banks.
Having at least the basics in order can be the difference between a 2-week approval and a 2-month delay.
At a minimum, you’ll likely need to show:
- an executive summary of your intended use for the loan
- business tax returns
- personal bank statements
- business bank statements
- proof of collateral
- credit report
- your exit strategy
Some lenders may require you to provide a personal guarantee especially if you’re a newer borrower.
It’s a good idea to prepare these in advance to show potential lenders that you’re serious.
Mistake #8: Not comparing lenders
Bridge loans are available from a range of private lenders and specialty financing companies that each have its own underwriting criteria and risk tolerance.
Find a lender that understands the type of commercial property you want to finance and the deal you want to execute.
Some specialize in certain asset classes like retail properties.
Are you looking at industrial or multi-family real estate?
Then you need a lender with a track record in that property type.
It’s best to compare multiple loan offers before signing anything so that you don’t miss out on better rates and more flexible terms.
You may be able to negotiate better terms if you have competing offers to compare, too.
Mistake #9: Overleveraging yourself
Biting off more than you can chew is the biggest mistake you can make when taking out a bridge loan.
If you’re already juggling multiple forms of debt, adding this other layer of obligation can squeeze your margins even thinner.
Make sure to stress test your cash flow across multiple repayment scenarios.
Do you have a backup plan if your exit strategy is delayed by six months?
Be prepared, be strategic
Bridge loans are flexible and valuable in a variety of CRE investing scenarios, but you need to approach it with your eyes wide open.
If you do your homework and avoid the mistakes we’ve discussed here, you’ll be in a strong position to secure funding that works for the goals you’re pursuing.
Paired with prudent preparation, a well-designed bridge loan from a trusted CRE lender like Private Capital Investors can open doors to time-sensitive acquisitions you might otherwise have to walk away from if you limit yourself to conventional financing.
Tell us about your project.
We can review the deal and let you know if a bridge loan is suitable, and then customize the terms to suit the property and your intended exit plan.
