How to Prepare for a Construction Bridge Loan

Construction bridge loans are a fantastic way to piece together two of your property investments. However, preparing for one can be a confusing and stressful time, especially with all of the other commitments you may have to your current property. To help you get ready for a construction bridge loan, we’ve prepared this simple list of tasks to complete before you apply.

Cash Reserve

Construction bridge loan lenders will typically require you to have sufficient cash reserves to cover certain contingencies. They may also require you to withhold a certain amount of your loan as an interest reserve rate.

Experience

You will be required to show a resume or portfolio of past properties that you have worked on. You have a much higher chance of being approved if your planned project is similar in nature to something you have worked on in the past. Your level of experience will have an impact on how much money you can borrow, the cost of originations and the amount of money you’ll be asked to hold in reserve. If you have no experience with the project you’re planning, then there’s virtually no chance of the loan being accepted.

Net Worth

Construction bridge loans typically don’t exceed the net worth of the borrower. When you apply for bridge financing, it’s important to provide financial statements to prove your net worth. The lender will use these documents to determine how much money they’re willing to offer you for a bridge loan. If several individuals are applying, then lenders will determine a collective net worth of all applicants.

Debt Service Coverage Ratio (DSCR)

An important qualifier for a bridge loan is your ability to handle the debt obligation, calculated using the debt service coverage ratio. The ratio measures the net operating income (NOI) of the property. This is calculated from the total gross income from rent, insurance, utilities, maintenance and so on. The NOI must be sufficient to cover the annual carrying costs for the financing. This is usually expressed in ratios such as 1.00, 1.25 and so on. Most lenders will require a ratio of 1.10 to 1.25.

Credit Score

Your credit score itself doesn’t play a huge part in your ability to take out a loan. Instead, it used to verify that refinancing your bridge loan with permanent financing is a viable exit strategy should you fail your project. It’s nowhere near as big of a factor as your net worth or DSCR, but it’s still a requirement to be accepted in the first place.

 

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