Bridge loans can be powerful tools in helping real estate investors transition from one property to the next. They are short-term loans designed to bridge the gap between immediate need and future revenue. However, no value is realized what an investor is denied.
As a form of private lending, bridge funding tends to be easier to obtain than its conventional counterpart. And yet investors are denied from time to time. There are valid reasons.
1. Insufficient Equity
Insufficient equity is arguably the most common reason for bridge loan denial. Imagine a scenario in which an investor has one of his properties up for sale. Meanwhile, he has his eye on another property he hopes to obtain with bridge funding. The lender is going to look at the equity in both properties.
Insufficient equity at either end could jeopardize the borrower’s loan application. In relation to the property being sold, insufficient equity could mean not realizing enough from the sale to pay off the bridge loan. Insufficient equity in the target could suggest it is not worth purchasing.
2. Lower Than Expected LTVs
Loan-to-value (LTV) ratios apply to bridge funding as much as any other type of funding. A borrower might expect a certain LTV only to discover that the lender is offering a lower rate. If the two cannot come to some sort of agreement, the lender might require a higher down payment than the borrower can reasonably arrange.
3. Property Location or Condition
Private bridge funding follows the same asset-based model used to write hard money loans. According to Actium Lending out of Salt Lake City, asset value is everything in a lender’s approval decision. Therefore, a property’s location and condition matter.
An undesirable location could undercut a property’s value. A property in poor condition might be too risky from the lender’s perspective. Either or both could lead to application denial.
A common problem in some regions is excess market depression. Under normal circumstances, a given property might represent a good risk. But if it is located in or near an overly distressed neighborhood, a lender might not be willing to take the risk.
4. A Questionable Project Budget
In addition to knowing the purpose of the loan, a lender is generally interested in the costs a borrower anticipates throughout the project’s timeline. If there is any reason to suspect that the borrower’s budget is inaccurate or unrealistic, a lender will think twice. A questionable project budget is a big red flag.
5. Insufficient Liquidity
Although private lenders don’t pay a whole lot of attention to creditworthiness, they do hope to see borrowers with significant liquidity. A borrower must be liquid enough to afford monthly interest payments before a loan will be approved. Insufficient liquidity will kill the deal every time.
6. A Lack of Experience
Bridge loans are a bit more risky than standard hard-money loans because they are contingent upon an expected source of future revenue. But that revenue may never materialize. Therefore, lenders are reluctant to write bridge loans for inexperienced investors. They would rather see a fairly decent track record first.
7. An Insufficient Exit Plan
Finally, borrowers are required to submit an exit plan with their loan applications. An application will likely be denied if the lender feels the exit plan is insufficient. Not having a solid exit plan presents too much risk.
Although there are other reasons a bridge loan might be denied, these are the most common. Bridge loans are great tools for real estate investors looking to grow their portfolios. But not every loan application is approved.