Bridging loans by Anton Tardif

Bridging Loans

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What is a bridging loan?A bridging loan is a monetary loan secured against real estate. These types of loans are also known as private money loans, hard money loans, short term loans, transitional loans, asset-based loans and rescue loans.

Where banks require a great deal of paperwork and documentation and can take a while to process the loan and release funds, bridging loan lenders require less documentation and can process loans much quicker. In addition, banks require strong collateral, great credit and good cash flow if you wish to borrow from them. Bridging loan lenders are happy to focus just on the real estate which is used as collateral for the loan.

Bridging loans often charge higher interest rates than banks but are commonly used by real estate investors who need funding quickly to secure a deal for their next piece of real estate. While banks and other institutional lenders take their time over approvals, bridging loans offer the speed and response times that real estate investors need. The lower interest rates offered by banks is offset by the profits on offer for real estate investors that can move quickly to snap up a bargain.

The average bridging loan lender will be able to fund a loan in less than 30 days. Some lenders can even fund a loan in two weeks or less.

What are the advantages of bridging loans?There are a number of advantages to using bridging loans instead of more tradition bank financing. These include:

9 A simpler application process and quicker approval decisions

9 Less scrutiny over the borrowers personal finance situation and credit score

9 Self-employment is not detrimental to your application

9 If you have a bank line of credit you can borrow above and beyond this line

9 Less time spent raising finance allows for more time to concentrate on your business

What are the disadvantages of bridging loans?As with all loans and investments, bridging loans have their downsides. These include:

9 They are more expensive and have higher interest rates than bank loans

9 There are a number of unscrupulous lenders in the market who look to foreclose on the underlying real estate as a business strategy

9 Some lenders may collect non-refundable deposits and then look to finance the loan or make no attempt to fund the loan at all

What are the risks involved in borrowing from a bridging loan lender?There are a number of risks that investors should be aware of. These include:

9 Risk of lost time if the lender does not lend

9 Risk of lost deposit if the lender doesn’t make the loan (and a deposit was required)

9 Market risk and execution risk on the underlying project

9 Risk of association with a less than reputable lender

9 Risk that the lender fails to make the loan in a timely manner

How do bridging loans work?A borrower is loaned a sum of money and terms are signed for the repayment of this money along with interest. The loan is backed by a piece of real estate allowing the lender (and the individual(s) who funded the loan) peace of mind that their investment can be recouped in the case of a default. In the case of a single family home, it is more common that interest rates will be fixed. For larger projects and commercial property, floating rates are more common due to the longer term.

Bridging loans can be backed by most forms of real estate. This includes commercial, industrial and residential property. It is uncommon but not unheard of to have bridging loans backed by raw land stated for development.

Some lenders focus their business activities on distressed situations. This means that they will offer a bridging loan when the borrower has a loan in default to help them refinance. However, the majority of bridging loan lenders will not lend on owner-occupied residences (including holiday homes) whether it is distressed or not. This is due to the increased scrutiny required by law and the fact that a defaulting loan could leave the occupier homeless.

Loan terms vary from 6 months to 3 years and are dependent on the project that the loan is required for. A single family home renovation would normally be between 6 and 12 months whilst a larger project such as a shopping center renovation would more likely be 2 to 3 years.

Bridging loans are typically funded by a collection of wealthy individuals or by funds who draw capital from a large number of investors. In most cases these individuals are real estate investors who invest in bridging loans to earn greater interest on their capital than they would if they left it in the bank and to offset their own use of bridging loans.


How can I secure a bridging loan?Due to the number of unscrupulous lenders in the market, it is best to get a referral for a bridging loan lender that has a good reputation. Once you have found a company you are happy working with, you can simply contact them and explain what capital is required and what for. You will need to provide the following information to the bridging loan lender:

9 Deadlines and dates that are critical to the transaction

9 The property address

9 Whether the loan is for an acquisition or to refinance

9 The purchase price of the property

9 The intended renovation budget

9 The expected final asking price (if the property is to be sold after renovation)

You will also need to provide the lender with a degree of documentation. The precise documents required will depend on the bridging loan lender you are using. Typically you will need the following:

9 Note and Deed of Trust

9 Personal guarantee from borrower

9 Personal financial statements

9 Letter of Intent

The purpose of the letter of intent is to ensure that the lender and the borrower are both on the same page. It is not a legally binding document but sets everything out in writing so that there can be no misunderstandings or miscommunications.

How much do bridging loan lenders charge?A bridging loan lender may or may not require a deposit. If a deposit is required, can vary wildly from $1,000 to tens of thousands. Deposits aren’t usually required for bridging loans on single family homes and borrowers should be wary of companies looking to take a deposit before the specifics of the loan have been set out.

Typical interest rates range between 7.5% and 12%. In addition you will be charged origination fees of between 1-3%. A number of lenders will have pre-payment penalties which guarantee them a minimum number of months interest.

What happens if the borrower is incapable of repaying the bridging loan lender?If a borrower defaults on a bridging loan, the ultimate recourse is for the lender to foreclose on the real estate which was used as collateral. Typically lenders will look to avoid this eventuality and there are a number of steps they will take before resorting to this.

How do bridging loan lenders decide how much to lend?For the most part residential loans require an appraisal from a third party, a property inspection report, a geology inspection and the borrower’s financial records. In addition, it is almost always the case that lenders will visit the property before making a decision.

Using this information bridging loan lenders compare the amount of the loan with the cost and value of the underlying real estate. These ratios are known as the Loan-to-Cost (LTC) ratio and Loan-to-Value (LTV) ratio. Specific ratio preferences differ between different companies. For the most part however Loan-to-Cost ratios will not exceed 75% and Loan-to-Value ratio is normally kept below 65%. This allows them to maintain a sufficient safety margin.

Can bridging loan lenders loan money even if there is another loan already in place?Borrowers can secure a bridging loan if there is another loan in place but they will need to either get a new bridging loan mortgage to replace the one already in place or will need to qualify for a subordinate junior loan which leaves the first loan in place.

How can borrowers tell if a bridging loan lender is reputable?Bridging lenders are regulated by a state’s Department of Real Estate. Each individual state may have their own regulations around bridging loan lending. In addition bridging loan lenders must have at least one person associated with the company that has a Real Estate Broker License.

If you have a complaint about a bridging loan lender, you can contact your state’s Department of Real Estate (DRE). Each lender must be registered with the DRE which allows for complaints to be filed and dealt with quickly and efficiently.

You can research bridging loan lenders and check whether they are reputable or not using the following techniques:

9 Ask for references from other clients and borrowers

9 Consider working with a mortgage lender that has previous experience with that lender

9 Confirm that the lender has a Real Estate Broker License

9 Find out if any complaints have been filed against the company


Can you change from working with bridging loan lenders to banks?Yes. You can get a bridging loan and then apply for a bank loan later on in the process to pay off the original loan. In many cases this is an attractive strategy as it allows those with bad credit issues in their past to continue with their project while they ‘age out’ the credit issue. It is worth noting that some bridging loan lenders will charge fees for early payment. This should be checked before switching to a traditional bank loan.

How do bridging loan lenders compete?Bridging loans are all very similar but companies compete in terms of fees, interest rates and the quality of their service. Quality of service and reputation means a lot to bridging loan lenders as people are so wary of unscrupulous lenders. This is why so many companies are focused on providing a high level of service that people are happy to recommend.

Why are bridging loan lenders so localised?Bridging lenders tend to be localised due to the importance of market knowledge in making real estate decisions. Local knowledge allows lenders to be sure about the dynamics of the local market. In addition lenders are reliant on referrals so it is easier to build a reputation in one place than it is to try and move into new markets.

Do legitimate businesses use bridging loans?Yes, a number of legitimate businesses, both large and small, use bridging loans to meet their funding needs. The majority use them because of their ability to acquire funding quicker than traditional lenders which allows the business to capture opportunities that they might otherwise have missed.

To invest, please contact

Castle Keep71-75 Shelton StreetCovent GardenLondon, WC2H 9JQ

Tel: +44 0207 030 3227Email: [email protected]

Why do bridging loan lenders need title insurance?Title insurance ensures that should the bridging loan lender need to take ownership of the underlying real estate then they are protected against any other party making a claim to the ownership. If there is such a claim, the insurance company take care of it. Title insurance in this instance offers the lender the same protections that the borrower has.

What are Mechanic’s Liens and how do they effect bridging loan lending?Mechanic’s Liens are placed on properties if the property owner fails to pay a contractor or the major contractor fails to pay sub-contractors. Title insurance does not protect against Mechanic’s Liens so if a loan includes a renovation budget, the lender ensures that all contractor and sub-contractor releases are properly executed before disbursing funds.

Are bridging loans personally guaranteed?Some bridging loan lenders will require the loan to be personally guaranteed. Others are willing to offer loans based simply on the history of the borrower and the specific opportunity the real estate offers. You should discuss with each individual lender as to what their stance is on personal guarantees.

How can I invest in bridging loans?Individuals can invest in bridging loans through a process known as Trust Deed Investing. This allows investors to either invest in specific loans or invest in a fund that manages a portfolio of loans. The portfolio approach allows investors to spread the risk of a loan going into default.