Bridge Loans Explained

What Is a Bridge Loan?

A bridge loan is a short-term financing instrument that covers a transitional period between two financial situations. The name comes from the concept of bridging a gap: you need to get from where you are financially to where you're going, and permanent financing either isn't available yet or isn't the right fit for the transitional period.

Bridge loans are typically 6 to 24 months, carry interest-only payments, and are repaid through a specific exit event: a property sale, a refinance to permanent debt, a construction completion that qualifies the property for stabilized financing, or another planned liquidity event. The entire loan structure is built around the exit, and if the exit doesn't work as planned, the bridge loan becomes a problem.

Common Use Cases

The most common residential use case is buying a new property before the existing one sells. Rather than waiting to sell first, a borrower uses a bridge loan against existing home equity to fund the down payment on the new home. The bridge is repaid when the old home sells. This works well when the sale is certain and near-term; it creates cash flow pressure when the property takes longer to sell than expected.

In investment real estate, bridge loans fund value-add acquisitions where a property needs repositioning before it qualifies for conventional or agency permanent financing. An apartment building with high vacancy doesn't qualify for a standard multi-family loan, so an investor uses a bridge loan during the lease-up period and refinances to permanent debt once occupancy stabilizes.

Construction bridge loans carry a project through completion and initial lease-up before permanent financing is available. A developer completes a building, gets initial occupancy, and replaces the construction bridge with a permanent commercial mortgage once the property demonstrates stabilized cash flow.

Typical Terms

Bridge loan rates typically run from 7% to 12% or higher, depending on property type, leverage, and sponsor experience. Points of 1 to 3 are common at origination. Extension options of 3 to 6 months are usually available for an additional fee (often 0.5% to 1% of the loan). Prepayment penalties are less common in bridge loans than in permanent commercial loans, since repayment is expected relatively quickly.

Exit Strategies and Their Risks

The three primary exit strategies for bridge loans are sale, refinance to permanent debt, and payoff from other liquidity. Sale exits are the simplest but depend on market conditions at the time of sale. Refinance exits depend on qualifying for the permanent loan at the time of refinance, which requires the property to be in the condition the permanent lender expects. Liquidity exits depend on the borrower having or generating other funds to repay.

Exit strategy failures are the most common cause of bridge loan defaults. The property doesn't sell at the expected price. The permanent lender's requirements have changed. The lease-up takes longer than projected. Coventry Enterprises LLC stress-tests exit strategies before clients commit to bridge financing, specifically asking what happens if the exit is delayed by 3 to 6 months and what that delay costs.

What Coventry Enterprises LLC Reviews

In a bridge loan review, Coventry Enterprises LLC examines the interest rate and points, the extension option terms and costs, the carry cost at multiple holding periods, the default and acceleration provisions, and the cross-collateralization language if multiple properties are involved. We also verify that the exit strategy is realistic given current market conditions rather than aspirational projections.

Bridge loans serve a legitimate and valuable purpose in real estate financing. They become costly when borrowers commit to them without a realistic exit plan or without fully understanding the extension and default provisions. For more on loan types and strategies, see our loan types guide and consulting services.