Why Strategic Borrowers Use Bridge Loans to Win Deals
You have the deal, the vision, and the plan, but not the time to wait for traditional financing. Will you walk away? You shouldn’t because this is where bridge loans, also known as gap loans, will become your competitive edge. Used by seasoned investors and strategic borrowers, these short-term solutions are designed to help you act now and sort out the details later.
Whether you are flipping properties or closing a time-sensitive transaction, this financing tool can help you outmanoeuvre slow-moving competitors.
How Do Bridge Loans Work?
Bridge loans or gap loans are short-term loans designed to bridge the gap between future expected capital and current financial needs. They are typically secured by real estate or another asset and have terms ranging from 6 months to 3 years.
Interest rates are higher than conventional loans, but for strategic borrowers, that is the cost of agility. As of November 2024, gap loan interest rates typically fell between 7% and 10%, higher than the 6.81% average for conventional mortgages and the 8.41% rate for home equity loans. In terms of fees, closing costs for bridge loans generally range from 1.5% to 3% of the loan amount.
Funds are disbursed quickly, often within days or weeks, with flexible underwriting that focuses on the asset and exit plan rather than just borrower income.
Example Use Case:
A commercial real estate investor identifies a distressed multi-family property at a steep discount but needs immediate funds to close. Conventional financing would take too long. A gap loan allows the investor to acquire the asset, rehab it, and exit through a long-term refinance or sale, all within 12 to 18 months.
Bridge Loan vs Traditional Loan
When timing and flexibility are crucial, understanding the differences between a gap loan and a traditional loan can help you make an informed decision. Below is a side-by-side comparison:
| Feature | Gap loan | Traditional home loan |
| Loan term | 6 months to 3 years | 10 to 30 years |
| Time to fund | 72 hours to 2 weeks | 43 days on average |
| Origination fees | 1.5% to 3% of the loan amount | 0.5% to 1% of the loan amount |
| Repayment structure | Interest-only instalments followed by a final balloon payment | Fixed monthly payments for property with interest over the loan term |
| Purpose | Short-term financing to bridge the gap between transactions | Long-term financing for property purchase |
What Can You Use a Gap Loan For?
Despite popular belief, bridge loans are not limited to homeowners or real estate investors. Their application spans multiple verticals:
Real Estate Transactions
This is the common use. Whether for residential or commercial purposes, bridge loans enable borrowers to close deals quickly in competitive markets or fund renovations before refinancing with a long-term loan.
Business Acquisitions
Entrepreneurs or companies looking to buy out a competitor or acquire assets can use bridge loans to act before arranging long-term financing.
Cash Flow Gaps
Businesses experiencing seasonal dips or waiting on large receivables often use gap loans to cover operating costs temporarily.
Bridge Loan Requirements
Securing a gap loan is not as simple as signing paperwork and collecting funds. It requires a strong financial profile and a clearly defined exit strategy. Lenders scrutinize several key areas before approving your application.
First, they look at the equity in your current property. Most lenders demand that you have at least 20% equity, as this serves as collateral for the bridge loan. Next is your loan-to-value (LTV) ratio, which generally must be 80% or lower.
Your credit score is another primary consideration. While minimum thresholds vary, most lenders expect a score between 620 and 740. A higher score could improve loan terms and interest rates, reflecting your creditworthiness.
Additionally, your debt-to-income ratio should typically be under 50%, proving you can handle monthly payments alongside other financial obligations. But numbers alone will not close the deal. Lenders also want to see a well-structured plan for repaying the bridge loan, whether through the sale of your current property, long-term financing, or incoming revenue from the new asset.
Why Strategic Borrowers Use Bridge Loans
Smart investors and business owners don’t just use bridge loans out of necessity; they use them as part of a calculated strategy.
Short-term Structure
One of the biggest draws is their short-term structure. Unlike 15 to 30-year mortgages, gap loans typically last less than three years, with many repaid in just months after a successful property sale. This allows borrowers to avoid long-term debt burdens while accessing capital quickly.
Fast Funding
While closing may take two to four weeks, in some cases, funds can be released in just a few days. This is ideal for time-sensitive deals or competitive bidding situations.
Flexible Repayment
Flexible repayment is also available. Some lenders allow you to defer payments until your current property sells or make interest-only payments during the term, offering breathing room when juggling two properties.
Trade Offs
Bridge loans offer strategic advantages for borrowers, but they come with inherent trade-offs that require careful consideration.
Higher Interest Rates
Speed and flexibility come at a price. Gap loans tend to be 1.5% to 2% higher than traditional mortgages, and borrowers must also factor in origination fees, closing costs, and appraisals.
Requirements
Qualification standards can also be a hurdle. Low credit, income, and equity can quickly derail your application.
Risk
Most importantly, there is a risk. Your current home acts as collateral. If your sale stalls or the market shifts, you could end up making multiple payments or, worse, face foreclosure.
FAQs
What are some alternatives to bridge loans?
If a gap loan doesn’t suit your needs, alternatives include HELOCs for tapping home equity, hard money loans for quicker access, mezzanine financing for hybrid funding, SBA loans for small businesses, and cash-out refinancing for lower-cost and long-term solutions.
What are some common misconceptions about gap loans?
Many believe bridge loans are only for real estate pros and are too risky. In truth, they suit various investors and can be safe with a solid exit strategy, especially when you work with professionals.
What happens if you can’t repay the gap loan on time?
Depending on the terms, you can face penalties, default, higher interest rates, or even foreclosure. Therefore, always have a realistic and well-planned exit.
Conclusion
When traditional financing can’t keep up, gap loans provide the short-term leverage you need. If you are ready to act fast and need a reliable partner, explore Joint Venture Loans. We specialize in real estate gap funding. Connect with us now and capitalize on your next deal.
