How to Compare Bridge Loan Lenders: 7 Factors to Consider Before Applying

What is a bridge loan?

A bridge loan is a type of short-term loan designed to "bridge" a financial gap until longer-term financing (or the sale of a property) is finalized. Bridge loans in real estate are often used by homeowners who are buying a new property before their current home sells. They're also a popular tool for real estate investors who need to move fast on a purchase before they're able to lock in conventional financing. Commercial real estate borrowers also use bridge loans to stabilize an investment property before qualifying for a more permanent loan.

Bridge loans are secured by real estate and designed to close quickly, making them a popular option for buyers who need to move fast. That said, this also means they work differently than traditional mortgages. Interest rates are often higher and loan-to-value ratios (LTVs) are one of the most important underwriting factors. Since bridge loans are short-term financing options, repayment is typically structured around an exit strategy: either selling a property, refinancing the debt into a conventional loan, or locking in another form of permanent financing by a certain date.

Seven factors to consider when comparing bridge loan lenders

Here are some of the most important things to look at when shopping around for bridge loan lenders and financing options.

1. Funding speed

Speed is usually the whole point of a bridge loan. If you could afford to wait 45 or 60 days (or more) to close with conventional financing, you probably wouldn't need a bridge loan in the first place. But different bridge loan lenders fund at very different speeds, and the difference between a 5-day close and a 3-week close can be the difference between winning and losing a deal.

Hard money lenders and private money lenders tend to fund the fastest, sometimes within just a few days. That's because they lean heavily on the value of your collateral property, rather than on an extensive financial underwriting process.

The type of bridge loan lender matters for speed, too. Online bridge lenders tend to move quickly while traditional banks and credit unions typically take a bit longer.

2. Loan amount

Bridge loan lenders have very different limits when it comes to loan amounts, so make sure the lender you're considering can (and will) fund what your deal requires. A lender that typically offers $300,000 residential bridge loans may not be the right fit for your next $8 million mixed-use building acquisition, even if they technically offer commercial bridge loans.

3. Interest rates

Bridge loans tend to have higher interest rates on average, compared to traditional mortgages or conventional loans. That's because bridge loan lenders are taking on more risk by offering short-term debt.

That said, rates still vary between different bridge loan lenders, so it's important to shop around and compare your options. On a large loan over a 12- or 18-month term, even a 1% to 2% difference adds up to a lot.

Many bridge loan interest rates are quoted monthly rather than annually; for example, you might see a loan offered at 1% per month rather than 12% per year. So be sure you're comparing your options on an apples-to-apples basis. Also pay attention to whether the rate is fixed for the term or whether it's variable and based on a benchmark rate. Fixed rates offer you consistency and the peace of mind of knowing exactly what your loan will cost you in the end. Variable (or floating) rates may be lower initially, but can work against you if the benchmark rises over time.

4. Fees

Bridge loan fees can add a lot to your total cost of borrowing, and they vary from one lender to the next. Some common fees to look out for include things like:

• Origination fees. These are typically 1% to 3% of your total loan amount, and can be either paid upfront or rolled into the loan.
• Closing costs. These might include the cost of any appraisals, title transfers, attorney fees, and administrative costs, similar to other real estate loans.
• Extension fees. If you need to continue your bridge loan longer than planned — either because you weren't able to sell another property or can't close on a permanent loan — you might be able to extend your bridge loan for a fee.
• Prepayment penalties. Some bridge loan lenders charge a fee if you pay off your loan ahead of time, which can be counterproductive if your property sells faster than expected
• Draw fees. If your bridge loan covers construction or renovation, there may be a fee for each draw from the loan.

Be sure to always review lenders' full lists of fees, rather than looking at just interest rates. Two lenders with similar interest rates can have very different overall costs once fees get factored in.

5. Repayment terms

Bridge loans are short-term by nature, but the repayment terms you're allowed to choose from will vary. Some lenders only offer six month terms while others go as far as 12, 18, or even 24 months. The right repayment term for you depends on your bigger plans and why you're borrowing in the first place.

If you're planning to sell your existing home in the next six months, a 12-month bridge loan term gives you a little wiggle room in case of a delay. If you're renovating a commercial property that might take 18 months to qualify for permanent financing, you'll need to find a lender that can support a longer timeline.

Also ask about extension options before you sign anything. If your exit takes longer than expected, are you allowed to extend the loan? And how much will that cost? A lender that's willing to work with you on extensions is worth more in a complicated deal than one that technically has a lower rate.

6. Collateral and LTV

Bridge loans are always secured by collateral, which is typically the property being purchased, the property being sold, or both. How much a bridge loan lender will lend against that collateral is expressed as a loan-to-value ratio (LTV). Many bridge loan lenders will lend up to 65% to 80% of the property's current value, though some hard money lenders will go even higher than that in exchange for higher rates.

LTV matters a lot for real estate investors because it determines how much equity you need to bring to the deal. A lender with a maximum LTV of 65% on a $2 million property will lend you up to $1.3 million, but a lender with a 75% maximum LTV will lend you $1.5 million. That $200,000 difference either has to come from your own bank account or another financing source, but either way, it's $200,000 more in down payment or equity that you have to bring to the table.

Some bridge loan lenders also allow what's called cross-collateralization, which uses the home equity on multiple properties to back a single loan. Using a portfolio of properties as collateral can increase your available loan amount and/or limit the cash you have to put down, though this isn't always an option with all lenders.

7. Lender experience

Bridge loan lenders can be established commercial banks, online direct lenders, private money lenders, hard money shops, or dedicated bridge loan programs. Some only work with residential clients while others welcome commercial borrowers. Some prefer clean and easy deals while others approve funding for projects that other lenders won't touch. The right one for you depends on so many different factors.

The lender's reputation and experience vary just as much. Before choosing a lender, find out how long they've been issuing bridge loans. Do they have experience in your market (residential versus commercial, local versus national)? What happens if something goes awry mid-loan? Are they known for working with borrowers through project hiccups or do they have a tendency to call loans due the moment something deviates?

Types of bridge loan lenders

There are a few different types of bridge loan lenders to consider if you're shopping around for this type of short-term funding.

1. Banks and credit unions usually offer the lowest interest rates for qualified borrowers, but can have strict underwriting requirements and slow loan funding times. These bridge loan lenders are best for borrowers with high credit scores, strong financials, and deals that can afford to wait for the application to clear.

2. Online direct lenders are often faster than traditional banks with an easier underwriting process. Rates can be higher than banks but are usually competitive with private money loans. Online lenders are usually a good option for borrowers who prefer to apply for a bridge loan online, versus in a brick-and-mortar location, and those who need funds faster.

3. Hard money lenders focus on the value of the collateral more than the borrower's financial profile. These bridge loan lenders are often the fastest funders and the most flexible on credit and income requirements, but they do tend to have the highest rates. This makes them a useful option if speed is the priority or if your financial profile wouldn't pass traditional underwriting requirements.
4. Private money lenders are small pools of individual investors or small funds that lend capital directly. They're similar to hard money in a lot of ways but with more flexible terms.

Final thoughts

When comparing bridge loan lenders, the right one for you comes down to matching each lender's strengths to what you actually need out of the deal. If speed is priority, look at lenders that can close in days. If a larger loan amount is the issue, make sure to find lenders that offer funding to match the size of your deal. And if you're worried about the exit taking longer than expected — such as if you're trying to sell your current home in a stagnant market — be sure to find a lender with reasonable extension policies and low fees.

Don't evaluate bridge loan lenders on interest rate alone. The total cost of a bridge loan is what really matters, and includes everything from your rate to the origination fees, closing costs, extension fees, and more. And with short-term bridge financing, the lender's reputation for working through complications is worth as much as any rate or fee comparison.