Bridge Loans

Bridge Loans

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What is a bridge loan?

By definition, a bridge loan is a real estate loan intended for a relatively short time period – typically ranging from six months to three years. Its name is derived from its function: it literally bridges a gap in financing, whatever the reason. Traditional commercial real estate loans funded by institutional lenders such as banks or life insurance company are typically long-term loans, lasting between 5 and 30 years. Bridge loans are financed by private capital and hard money lenders. As such, they usually have higher interest rates and loan fees, but these costs are offset by the speed at which they can be obtained. As a Denver, Colorado-based hard money lender, Montegra is able to underwrite bridge loans for local borrowers in a timely manner.

How Do Denver Bridge Loans Work?

There are times when the restrictive criteria associated with traditional lending simply do not meet the needs of sophisticated commercial and investment residential borrowers. This is where Colorado bridge lenders like Montegra can help. Whether you’re an investor interested in moving forward with a real estate purchase and do not have time to deal with the weeks (or sometimes months) that institutional lenders like banks require, a bridge loan may provide the required capital in a timely way.

How do bridge loans work? This loan type earned its name because it bridges a gap in traditional lending. Suppose for example, you have finally found the right land to buy to build the commercial property you need but the seller insists on closing the sale in an extremely short time frame. If you have 100% of the cash for this land purchase in your bank account – no problem. If you, like almost all commercial real estate investors, need to leverage your purchase, it may be time to learn more about bridge lending and bridge lenders.

When the perfect property, at the perfect location comes on the market, you do not want to take a chance to lose it to another buyer. Many sellers are more willing to sign a contract that does not have a loan contingency. Working with a bridge lender, such as Montegra Capital, you may be able to commit to buy the property without a loan contingency because your initial contact at the bridge lender typically is with the decision maker, not a junior employee, and you can often get a commitment for a loan within 24 hours.

Things to Consider with Bridge Loans

Before you secure a Colorado bridge loan, it’s important to understand all the facts, including potential drawbacks, so you can make an informed decision that works for you. The first thing you need to know is that bridge loans typically feature higher interest rates and APR than traditional loans, and they typically offer a shorter term than some bank or life insurance company loans. Montegra’s bridge loans are written for a term between 6 months and 3 years. However, because bridge loans are payable interest only, instead of requiring monthly amortization of loan principal, the interest only payments may be similar to, or in some cases, even lower than, amortized bank loans.

Eligibility for a Colorado Bridge Loan

There is good news and bad news! The good news is that almost anyone with half way decent credit can qualify for a bridge loan. The bad news is that bridge lenders like Montegra only lend up to 65% of appraised value on improved properties and up to 50-55% of appraised value on land loans. This means that while it is not difficult to qualify for a bridge loan, you will have to be able to bring substantial funds of your own to the table to close your purchase.

What You Need to Know about Bridge Loans

If you’re a business seeking commercial property, finding the right real estate loan can be a daunting process, especially if you find yourself in difficult circumstances.    This is where a bridge loan enters the picture, offering a short-term solution when other avenues of lending don’t pan out.

A bridge loan, so called because it bridges gaps left by other loan types, is generally meant to act as a step that leads to typical, long-term real estate loans.  Supported by private capital and other non-traditional lending sources, bridge loans are an ideal solution for buyers struggling to gain loan approval from banks, often due to a gap between selling one property and buying another, or circumstances like purchasing a second or additional property, such as income properties, or other commercial properties.

The main thing to understand about bridge lending is that it’s intended to offer financing for a short period of time, usually with terms of six month up to three years.  This means it is an interim solution to help you buy more time to nail down a traditional, long-term loan or commercial real estate lending.  Because this is a specialized loan type, interest rates are often higher than traditional bank loans.

Why do borrowers use bridge loans? Here are the most frequent reasons:

  • Can close quickly if borrower doesn’t have the time to arrange for a bank loan (or if another loan has fallen through at the last minute).
  • Can save a property from foreclosure.
  • Can buy a property that is not fully leased (or even one that is empty) to give the borrower time to lease it up so that the debt service coverage will meet a bank’s requirements.
  • Can purchase land and hold it until construction loan financing is obtained.
  • Can refinance a property to get cash out when banks are unwilling to do so.

Buying a Business and need property?  Bridge Lending Can Help

There can be complications with securing traditional real estate lending for a business or commercial property.  If you already have one or more loans from a bank, it can impact your approval for additional lending.

With a bridge loan, you won’t have these issues since there are really no contingencies (like selling another property) to hold you up.  You can secure funding quickly so you don’t have to miss out on opportunities or lose out to other buyers.  Whether you’re interested in a rental property or a multi-unit dwelling intended to generate passive income, bridge lending can help you get your project off the ground and earning so you can apply for traditional lending at a later date.

Bridge Loan

What is the difference between a Bridge Loan and a Mini-Perm Loan or a Permanent Loan?

The way professionals in the mortgage lending business describe their loan products can sometimes be confusing.  The savvy real estate investor should be able to clearly understand the differences between the various loan types so they can select the one that best serves their needs.

Permanent loan

The permanent loan is the type of loan that is the most familiar kind of loan to commercial real estate investors.  This is a first mortgage secured loan on a parcel of real estate that has a fixed term of between 10 to 30 years.  This type of loan is typically fully amortized over the length of the loan. This type of loan is most often funded by life insurance companies.  Because a permanent loan may have a long- term maturity – say up to 25 or 30 years – it can be amortized using monthly payments that do not change over the entire length of the permanent loan.  If the lender does not want to keep this loan for 25 or 30 years, they may require what is called a balloon payment.  A “balloon payment” simply means that although the loan is amortized over (say) 25 years, it becomes due and payable after (say) 10 years.  This means that this loan is not completely amortized and there is still a substantial amount of loan principal due the lender which is the balloon payment balance.  The fixed rate permanent loan with a 25 to 30-year term is most frequently funded by life insurance companies.  Banks also fund permanent loans, but banks will always require a balloon payment of between 5 to 10 years while life companies may fund loans that can be held for the full 25 to 30- year term.

Advantages/disadvantages of permanent loans.   The advantage of a permanent loan is clear.  It gives the borrower a loan with a maturity far in the future.  The borrower only pays an upfront loan origination fee (points) once at the beginning of the loan and then has many years without any additional charges.  At the end of the term of the permanent loan there is a $0 balance due.  There are however significant potential disadvantages of a permanent loan. The most serious disadvantage is something called “yield maintenance”.  Life insurance companies frequently have a requirement that if the loan is paid off before its 25 to 30 year maturity, the borrower must pay a very large prepayment fee – called yield maintenance – which means that the life company is entitled to get the yield on their loan for X number of years even if the loan is paid off.  The amount of money the borrower must pay to get out of their loan can be extremely high.  For many permanent loans this penalty is so high that the borrower can’t afford to get out of the loan so even if interest rates go down, and it would be great to take advantage of lower rates, they are basically locked in to their loan at a higher than current interest rate.

Mini-perm loan

  This is one of the most common types of loans that banks offer to real estate borrowers.  This is a loan with a long-term amortization schedule but a relatively short-term balloon payment.  The mini-perm loan normally has a balloon payment due in 5 years but has monthly payments set using a 25 or 30 year amortization.  This helps to keep the monthly payments down but leaves the borrower with a large balloon payment when the loan matures. It is called a mini-perm because it has the amortization of a long-term permanent loan but a short-term balloon – hence the “mini” description.

Advantages/disadvantages of the mini-perm loan.  The advantage of a mini perm is the ability to make smaller monthly payments that result from using a long term 25 or 30 year amortization table.  To fully amortize a loan over 5 years creates such large monthly payments that few, if any, borrowers would want to sign up for these unaffordable monthly payments.  The disadvantage is that there is a substantial balloon payment at the end of the 5-year mini perm maturity.  These loans may or may not have prepayment penalties, but if they do, the prepayment penalty is not as steep as the permanent loan yield maintenance requirements.

Bridge loans

The bridge loan is typically funded by a private capital lender, such as Montegra Capital.  As its name implies, a bridge loan is seen by a real estate investor as a relatively short-term solution to their borrowing needs.  Because private money real estate lenders are not regulated by the Federal government, they can offer more flexibility in their loan terms than banks and life insurance companies.  A bridge loan typically has a term from 6 months to 2 or 3   years.  It is almost always payable “interest only”.  That means that the monthly payments do not require any principal reduction – which means these payments are lower than if amortized payments, even amortized payments using long term amortization tables.  Some private lenders will charge a relatively affordable prepayment penalty while others will not have one. Bridge loan borrowers typically choose this type of loan because they may intend to improve the property and thus qualify for a larger amount of a permanent or mini perm loan or they may intend to resell the property at a profit in a relatively short time frame and  are looking for the flexibility that a private lender may offer them.

Advantages/disadvantages of a bridge loan:    The advantages of a bridge loan are the great flexibility that private lenders can offer in the structuring of bridge loans.  A private lender normally will offer interest only payments.  They can offer very short loan terms – sometimes as short as 6 months.  The underwriting guidelines for bridge loans are more focused on funding a conservative loan to value for the property while banks and life insurance companies have stricter credit and cash flow requirements.   The disadvantage of private lender bridge loans is that they typically carry somewhat higher interest rates than banks or life companies.  The informed real estate investor must weigh the pros and cons of these 3 types of loans to select which of them is best suited to their individual needs.  With 49 years of experience in funding bridge loans, Montegra Capital is available to work with commercial and residential investment real estate investors to structure a loan that fits their specific needs and offers the ability to close their loan very quickly and with  minimal red tape.

What are the differences between bridge loan interest rates and terms and those of standard traditional real estate loans?

As of spring 2020,  banks and institutional lenders are  funding  loans  at the lowest interest rates in a generation.  Bridge loans carry higher interest rates – typically ranging anywhere from 9% up to as high as 15% – with loan fees usually set between 2% and 5%.  While bridge loans generally do not exceed a 65% loan-to-value (LTV) rate, bank loans may be funded as high as an 85% LTV rate.  Additionally, some bridge lenders require an equity participation in the real estate project, but most do not.

Bridge Loan Terms and Conditions

Traditional lending can leave a lot to be desired when your circumstances don’t fit qualifications for a typical borrower (i.e. a buyer seeking a primary residence).  Bridge lending can serve as a valuable tool to help you reach your long-term goals, but you have to understand the limitations of this type of lending going in.

A short-term bridge loan is only good for a term of six months to three years, so you need to be prepared to assume a long-term loan before your bridge loan expires.  In addition, you should expect higher interest rates than you see with long-term mortgage loans.  You may pay 9-15% for a bridge loan, and this is because of the conveniences you’ll gain, as well as the shorter term.

Montegra funds Colorado bridge loans.

All of the loan types offered by Montegra – whether they are secured by commercial properties or investment-purpose residential properties – are short-term, six months to three-year loans.  Montegra’s interest rates start at 8% with loan fees set between 1.5% and 3%.  Our loans are paid “interest only”.  This means they do not amortize helping to minimize monthly payments.  To counter the higher interest rates, Montegra offers flexible lending terms that fit each borrower’s needs.  Montegra also delivers quick closings, between three to four weeks from initial request to closing – and is able to fund loans even if they have been rejected by institutional lenders – because debt service coverage is not up to bank standards or other issues have disqualified the application.

For more information, contact us today at (720) 513-2657.