When to Use Bridge Loans vs. DSCR Loans

Most brokers and lenders are familiar with DSCR loans, which provide real estate investors with a way to finance rental properties based on rental income rather than their personal credit profiles. Another powerful tool that real estate investors can utilize is the bridge loan. While both can help investors finance property acquisitions, they are built for very different stages of an investment strategy. Understanding the strength and limitations of each product can help lending partners make better recommendations and guide their clients to success.

Read on as we cover the key differences of these investor-focused financing programs and how to maximize their effectiveness for your clients.

What Is a Bridge Loan?

In simple terms, a bridge loans is a short-term financing tool for transitional situations. These loan typically have shorter loan periods ranging from 6 to 24 months, and offer fast closings as well as interest-only payment options. Loan underwriting is based on asset-value and exit strategy, which helps expedite the underwriting process and can make it easier to qualify for financing. They’re designed to help investors “bridge” the gap between an acquisition and more permanent financing. They’re also commonly used in time-sensitive scenarios, and for funding renovation projects & value-add opportunities.

What Is a DSCR Loan?

DSCR financing is offered by private lenders rather than conventional institutions like banks and credit unions. Qualification is primarily based on cash flow, and how well the property’s income can cover it’s debt. It’s a long term structure, with a 30-year loan period that’s best suited to a buy-and-hold strategy. Investors normally use these programs for financing single-family rentals and 1-4 unit multifamilies, but the key advantage they offer is that they’re typically approved faster than traditional mortgages. Plus, they don’t have the same strict limitations of agency programs, which helps enable easier portfolio expansion.

Bridge Loans vs. DSCR Loans at a Glance

When a Bridge Loan Is the Better Choice

In certain scenarios, investors will be better off using a bridge loan to secure a property, and seeking out more permanent financing afterwards. This can include:

• When a property needs significant renovations: Banks may not be willing to lend on properties in need of repair. Instead, borrowers can renovate distressed properties using bridge loan funds which allows them to secure more favorable terms
• When speed is critical: The main advantage of using bridge loans is their expedited approval process. Bridge loans can be highly effective in competitive markets where speed is key to winning deals.
• When the property is not yet profitable: Qualifying for DSCR financing can be difficult if a rental property isn’t generating enough income to justify a loan. Using a bridge loan, an investor can make improvements to an existing property, increasing rent and enabling them to receive permanent financing.
• When the borrower needs time to secure permanent funding: You may have a borrower who wants to move forward with a lucrative deal but is still in the process of selling an existing property. A bridge loan would allow them to make the purchase and still give them time to complete the sale before repaying the loan.

When a DSCR Loan Is the Better Choice

On the other hand, there are certain times when DSCR financing is a more suitable option. This includes:

• When a property is already producing income: DSCR loans are best suited to properties that consistently produce rental income. This simplifies the loan process and makes it easier to obtain approvals.
• When the investor wants stable, long-term financing: The longer loan period of DSCR programs is designed for investors who think long-term. Investors who are looking to build-wealth can receive more predictable financing costs that support their portfolio growth strategies.
• When renovations are already completed: After making renovations to a property, income can become more stable which allows a borrower to secure more favorable financing terms. In these circumstances, DSCR loans are perfect. Still need to finance renovations? Get a bridge loan.

The Bridge-to-DSCR Strategy

One of the most common financing strategies involves using bridge and DSCR loans on the same property. This can be referred to as a “fix-and-hold” real estate strategy. It typically involves acquiring a property & funding renovations with a bridge loan, leasing with stronger cash flow, and refinancing with a long-term DSCR loan. This gives investors access to potentially improved cash flow, better cap rates, and more flexibility with the types of properties available for acquisition.

Common Mistakes Brokers Should Help Clients Avoid

As a broker, you can help guide your clients’ strategies so they make more effective use of private loan programs. Help them establish clear timelines with repayment plans in mind, and show the importance of accurate estimates with renovations timelines. Also, showing them the value of bridge loans is key. They may initially be put off by the higher rate, but walk them through the opportunity cost of missing a profitable opportunity and how these programs can expand available options for investors.

RCN Capital

If you want to provide your clients with a stellar lending experience, partner with a lender that has a proven track record in the real estate investing space. 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.