How do Bridge loans work?

[Seth Baumgartner]

I'm just starting out, I have never used a loan and I'm having trouble understanding what's normal for loans. I'm Specifically interested in bridge loans and what is normal for them.

[Riaz Gillani]

A Bridge Loan is a mortgage loan secured by the property wherein the proceeds are used for the purchase or refinance and the subsequent renovation of such property ... ideal for a Fix and Flip or Fix to Rent. They are short term in nature - think 12mo term and are Non-Amortizing (aka no principle pay down - Interest Only Payments). They effectively 'bridge' an investor from the entry stage (distressed property or need to close quickly) to the takeout (sale or refinance). 

What's normal for them: Like I said before, interest only payments. Also higher interest rates than you may be accustomed to when getting long term loans (9.00 to 12%+). Generally no prepayment penalty so you can effectively dispose of the loan at any time without incurring a fee. May or may not have a construction reserve held in escrow. They should close somewhat quickly (14 to 30 days on average). 

A lender qualifies or approves of them by using the values (AIV and ARV) of the property and maybe some metrics on the borrower (experience and / or credit score). Tax Returns, Income, DTI all non-factors.

Be careful who you trust in the space. A lot of money and time can be wasted if you jump in with the wrong lender.