Bridge loans are often taken out in order to buy another property while they wait for an existing property to sell. Bridge loans obviously don’t come without a risk, but they’re an excellent way to, as the name implies, bridge the gap between the transition of two or more properties. It’s one of the best strategies to use when approaching lenders for a larger commercial loan, but the criteria to apply for one can often be strict.
In this article, we’ll be talking about what a lender looks for when a borrower approaches them to apply for a bridge loan.
Net worth is one of the most important metrics in determining your eligibility for a bridge loan. In most cases, your loan amount will be equal to your net worth.
Lenders that offer bridge loans are always looking for experienced individuals. You will likely be asked to demonstrate your previous projects, and this will have an impact on how much money you can borrow.
You may be asked to show proof of sufficient cash reserves in order to cover for contingencies. They may also hold back a certain amount of the loan proceeds as an interest rate reserve.
You’ll need to provide sufficient documentation in order to qualify for a bridge loan. This will include a credit report, tax returns and a resume. You’ll also be asked to provide an exit strategy, breakdown of the renovation costs on the property and an executive summary.
Short Loan Terms
Loan terms are often shorter for a bridge loan due to the conditions. Most lenders won’t offer a term longer than 3 years, so it’s important to present a short loan term when you’re applying.
High Loan Amounts
Lenders are usually more interested in larger sums of money. You’ll typically want to start at a minimum of $1,000,000.
Quality of Property
The quality of your property will play a factor in your eligibility for a bridge loan. Some lenders will also look at the DSCR (debt-service coverage ratio) of the completed property. Most lenders will require a ratio of 1.1 – 1.25.
While credit score doesn’t play a big part in commercial bridge loans, lenders do expect you to have a score of 650 or more. However, this isn’t so much for the bridge loan itself, but more for refinancing your bridge loan with permanent financing as an exit strategy.