Understanding Short Term Bridge Loan Rates in 2023

Short term bridge loans can be an effective financing tool for real estate investors and developers. As their name suggests these loans “bridge the gap” between the purchase of a property and securing permanent financing. While bridge loans come with higher interest rates than conventional mortgages, they provide fast access to capital that may not be available through traditional lenders.

In this comprehensive guide, we’ll break down everything you need to know about short term bridge loans, including current rates, qualifying criteria, pros and cons, and tips for getting the best terms. Whether you’re an experienced investor or just starting out, this information will help you make an informed decision when considering a bridge loan

What Are Short Term Bridge Loans?

A short term bridge loan is a type of financing with a term of 1 year or less These loans are secured by the property being purchased but don’t require the lengthy underwriting process of a conventional mortgage

Bridge loans are ideal for investors who need to move quickly to acquire a property before permanent financing is in place. The loans provide short term funds to close the purchase, giving the borrower time to secure a take-out loan, complete renovations, or implement their business plan.

While bridge loans can have terms up to 3 years, loans with a 1 year term or less are considered “short term.” The shorter timeframe reduces risks for lenders, allowing them to offer better rates than longer bridge loans.

Current Short Term Bridge Loan Rates

Short term bridge loan rates currently range from 7% to 11% for a 1 year term or less. Average rates tend to fall around 9% to 10%.

Here are some factors that influence short term bridge loan rates:

• Loan-to-value (LTV) ratio – Loans with a lower LTV generally have lower rates. The maximum LTV is usually around 80%.

• Credit score – Borrowers with higher credit scores can qualify for lower rates. A minimum score around 650 is often required.

• Location – Properties in more stable/desirable real estate markets may garner better rates.

• Asset type – Loans for multi-family or commercial properties tend to have lower rates than single-family homes.

• Loan term – Shorter term loans have lower rates. A 6 month term will have a lower rate than a 12 month term.

• Loan purpose – Cash-out and new construction loans involve more risk and have higher rates.

• Lender – Rates can vary between different private lenders. Shopping around helps get the best rate.

Short Term Bridge Loan Qualification

While bridge loans are easier to qualify for than conventional mortgages, there are still eligibility requirements:

• Credit score – Most lenders look for a minimum score around 650. Some may accept a lower score with a larger down payment.

• Down payment – Typically 20-30% down is required, but can be as high as 50% depending on the lender.

• Debt-to-income ratio – Your total monthly debt payments, including the bridge loan, should not exceed around 50% of your gross monthly income.

• Loan-to-value ratio – Most lenders cap LTV at 70-80%, meaning the loan amount is 70-80% of the property’s value.

• Property – Residential and commercial properties are eligible. Undeveloped land is considered higher risk.

• Exit strategy – You must have a viable plan to pay off the loan at maturity, such as selling or refinancing.

• Experience – Most lenders want to see that you have experience in real estate investing.

As you can see, the approval criteria is focused more on the real estate opportunity itself rather than your personal finances. This allows bridge loans to accommodate a wider range of investor profiles.

Pros and Cons of Short Term Bridge Loans

Short term bridge loans offer some attractive benefits, but also come with drawbacks to consider:

Pros

• Fast access to capital – Can close in as little as 2 weeks

• Lower rates than longer bridge loans – Rates from 7% to 11%

• Requires less documentation than conventional loans

• More flexible qualifying criteria than standard mortgages

• Allows time to improve property value before securing take-out financing

Cons

• Higher rates and fees than conventional financing

• Risk of being unable to pay off loan at maturity if exit strategy fails

• Requires 20-50% down payment in most cases

• Poor credit borrowers may not qualify or face very high rates

• Property is at risk if default occurs before take-out loan is secured

For experienced investors with a solid game plan, short term bridge loans can be an extremely useful tool. But they do come with risks that require careful evaluation.

Tips for Getting the Best Short Term Bridge Loan Rates

Here are some tips to help you secure the lowest short term bridge loan rates possible:

• Aim for at least a 700 credit score – While scores of 650+ may qualify, 700+ will get better rates

• Shop multiple lenders – Compare offers from private lenders and mortgage brokers

• Minimize LTV – Put down as large of a down payment as possible, even 50% if you can

• Target lower-risk property types – Multi-family and commercial assets often have cheaper rates

• Keep loan term short – Opt for a 6 or 9 month term over a full 12 months

• Bring equity to the table – Capital from other assets you own may help strengthen your application

• Highlight experience – Emphasize your real estate investing track record

• Get pre-approved – This shows sellers you have financing lined up to move quickly

By optimizing these areas, you can potentially shave 1% or more off the interest rate for your short term bridge loan. Just a single percentage point can equal thousands in savings over the loan term.

Alternatives to Short Term Bridge Loans

If you decide a short term bridge loan isn’t the right fit for your goals and budget, here are a few alternative financing options to consider:

• Hard money loans – Similar to bridge loans but typically have higher rates and fees

• Home equity loan – Uses equity in an existing property as collateral; lower rates than bridge loans

• Business cash-out refinance – Refinance commercial property owned by your business to access equity

• Owner financing – Some sellers may provide their own in-house financing to a buyer

• Crowdfunding – Pool capital from multiple smaller private investors

• Private money loans – Loans from individual investors rather than institutions; more flexible than banks

Each option has its own pros and cons, but exploring all of your possibilities is the key to finding the most affordable capital for your real estate purchase.

The Bottom Line

Short term bridge loans allow real estate investors to pounce on time-sensitive opportunities and avoid losing out to competing buyers. But as a form of alternative financing, they come at a price in the form of higher interest rates and stricter approval requirements compared to conventional mortgages.

By understanding current rates, which average around 9-10%, and following tips to get the lowest rate, you can keep bridge loan costs down while still benefiting from their speed and flexibility. Weigh the pros and cons carefully for your individual situation. And be sure you have a solid exit strategy to take out the bridge loan when it matures in 6 months to a year.