Bridge Loans vs. Conventional Financing: What Brokers Should Know

Bridge loans are an incredibly powerful tool investors can use in real estate scenarios where a traditional mortgage doesn’t meet their needs, or just don’t make much sense. These short-term loans provide investors with speed, flexibility, and the ability to fund complex real estate deals. They allow brokers and lending partners to fund a wider range of investments and expand your deal pipeline.

Are you interested in adding bridge loans to your product offerings? Continue reading to find out everything you need to know about these loans, how they differ from traditional mortgages, and how offering them can help grow your lending business.

What is a Bridge Loan?

Let’s quickly cover the basics of bridge financing. Unlike conventional mortgages, these are short-term loans designed to “bridge” gaps in an investor’s finances. They are commonly used to acquire properties before permanent funding can be secured, such as when an investor is in the process of selling an existing home. Their shorter term also makes them great for quicker investments like fix and flip projects. Bridge loans can be approved faster than standard mortgages, which can be critical in competitive markets. However, their shorter term also means they come with higher interest rates than their standard mortgage counterparts.

Key Differences Brokers Should Understand

Other than their elevated interest rates, there are a few key differences brokers should understand before offering these loans:

• Bridge loans can be funded very quickly, with financing delivered in as little as 10 days when compared to weeks or even months with a bank loan.

• Approval is asset based, which means it relies on the property’s value rather than the borrower’s credit score or personal income.

• Due to the short-term nature of these loans, there is a risk that the borrower will be unable to repay the loan within the given timeframe. Be sure to talk to clients about implementing a viable exit strategy, and even a backup strategy in case things don’t go as planned.

Advantages of Using Bridge Loans

Bridge loans provide investors with a competitive advantage that conventional financing simply can’t provide. Naturally, their ability to deliver funding quickly is key for winning in today’s fast-paced market environment, and helping secure lucrative opportunities before they disappear. However, they also enable investors to make all-cash offers on properties, which can often be the key difference that allows them to win deals. Besides beating the competition, they allow investors to fund a wider range of investments that traditional lenders are not keen to lend on. For instance, banks may not be willing to finance a property in need of major repairs as they may deem these investments too risky. Similarly, a borrower can use a bridge loan to make upgrades to an older rental property, improving cash flow and allowing them to secure more permanent financing.

When to Recommend Bridge Loans

Here are some ideal scenarios to recommend a bridge loan to a client:

• When a client has less than stellar credit or non W-2 income: because bridge loans are asset based, lenders are less concerned with the borrower’s personal finances, and will focus on whether the property itself makes for a good investment.

• When a client has temporary liquidity issues: bridge loans allow borrowers to place all-cash offers on properties when their funds may be tied up in other places. This gives them time to acquire new properties, and then repay the loan once they secure more permanent funding.

• Investors planning renovations or value-add projects: it may be difficult to secure financing for renovation projects or value-add investments, especially if the borrower has limited experience with these types of projects. Bridge lenders are more willing to fund these deals, and can be the lifeline investors need to move forward with them.

• In competitive bidding situations: bridge loans offer unmatched speed, allowing investors to gain access to liquidity sooner than with other types of loans. This helps them win in competitive bidding situations and with time-sensitive deals like auctions or foreclosures.

How Brokers Can Add Value

Beyond providing investors with financing, your clients rely on your expertise to help bolster their real estate investing strategies. Take the time to educate clients on the pros and cons of using a bridge loan, so that they fully understand how to effectively utilize one. Help them structure deals where the numbers make sense, and which have clear exit strategies in order to ensure their success when using these loans. Finally, partner with a lender who specializes in bridge financing, and understands the unique needs of the investment scenarios that require this type of loan. A stellar lending partner will not only be able to provide you with loan programs, but also tools and resources to bolster your lending capabilities.

RCN Capital

To help your clients maximize the returns on their next investment, partner with a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer bridge financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.