There are plenty of situations in which a bridge is a great fit to fill gaps in your financial plans. To gain capital for a new project, to fill out lost tenancy opportunities, or to hold over your outside financing until a long-term loan becomes a viable option for your investment. But as useful and sometimes necessary as bridge loans are, there are wrong times to explore them as an option. Before you dive into your next commercial bridge loan, consider these instances where a bridge loan is likely not the best fit for you.
When your prospective project is high risk – As is the message behind many a Greek Tragedy, hubris is often the downfall of man. While bridge loans come with an incredibly fast turnaround time, they also feature interest rates which are higher and terms which are shorter than other traditional loan options. Considering these options, if your project is not likely to receive long-term financing due to a high risk of failure or profit shortcomings, a bridge loan is likely to end up costing you more than it aids you.
“Bridge Loans can be a powerful financial tool for real estate investors”
When you are already in volatile debt – Loans are common financing options when navigating real estate projects, meaning that they can pile up if not managed properly. While bridge loans can be used to pay off existing long-term loans from previous projects, they are not a wise option if you are already facing extensive debts without a solid prospect of income in the near future. Given a bridge loan’s high interest rate and necessary physical collateral, relying on them to tackle debt is likely to work against you.
When your lender is not being transparent – Sometimes factors beyond your control contribute to whether or not a loan option is best fit for your situation. While experienced real estate investors know to be wary about their relationships with lenders, those newer to the market may not be as aware. Always ask about the fees and potential penalties associated with a loan package. While this is not exclusive to the nature of bridge loans, given the potentially volatile nature of the bridge loan’s interest, it is important for you to know exactly what the terms of the agreement are before you commit to the loans. If your lender is not being transparent about those fees and potential penalties, consider taking your business elsewhere or a lower-risk loan.
“Knowing the right and the wrong time to seek a bridge loan is critical.”
When your median credit score has taken a hit – Like most other loan types, bridge loan lenders will not issue a loan if a client’s credit score is below a certain threshold. Most lenders consider their threshold to be 680, meaning that if your score is 679 or lower, you are not likely to be accepted for a commercial bridge loan. In some situations, a lender will allow you a co-signer or guarantor, but if you are not in a situation where you have a partner with a more appropriate credit score, then you may be out of luck. Always feel free to talk openly with your lenders, but it is important to not build your project plans around a loan which you may not be able to claim.
Commercial bridge loans are a vital part of the real estate industry, from fix and flips to new builds and everything in between. Despite their frequent necessity, it’s important for you to know when and if a bridge loan is the best financing option for your situation. If you’re interested in a bridge loan, but unsure whether or not it would be the right fit for you or your projects, talk to the experts! Our team at EMCAP lending will be glad to help you find the best option for your goals. Please contact us today for more information.