A record number of maturing loans, high rates on perm loans, and a desire for flexibility are fueling a rise in demand for quick-close bridge financing.
At Boulder Equity Partners LLC, the majority of our recent bridge loan clients are facing loan maturity and need to refinance in 2023. While these borrowers may have the option to extend, many are choosing not to. Instead, they are looking to take out the maturing loan with bridge financing.
Bridge Loans Carry Shorter Prepayment Penalties
One of the main reasons for this is the high prepayment penalty that accompanies the perm loan extension. Faced with years of penalties or yield maintenance should they decide to sell or refinance to a lower rate, these borrowers are instead shopping bridge loans for the shorter prepayment period.
Last year saw record federal funds rate hikes. Perm loans have proven more susceptible to the corresponding interest rate hikes than bridge loans, putting the two on par when it comes to monthly payments. With a shorter prepayment period and an easier underwriting process, bridge financing is becoming increasingly popular with investors who want to wait it out until the rates go down before locking in long-term.
Bridge Financing Easier to Underwrite
With recession fears looming, banks are pulling back funding. We’ve encountered borrowers who were declined mid-loan processing simply because the lender chose to stop funding. Those borrowers often are challenged to close an alternative loan in time to meet maturity default, purchase contract deadlines, or get the cash-out they need.
While perm loans can take months to close due to the arduous underwriting process, bridge financing can fund in as little as two to three weeks. The income requirement for bridge loans is more palatable and underwriting more streamlined.
How to Keep Your Bridge Loan Quick-Close
That said, a bridge loan still requires a layer of underwriting and still can be delayed or fail at the last minute. To keep a bridge loan on track for a quick close, a borrower should:
Talk over any known issues with the lender prior to submitting the loan request. Often, a letter of explanation is all that is needed, but being prepared saves time.
Keep documentation in order so it is easy to submit when requested. We’ve seen loans delayed because the borrower is too slow to respond to simple document requests. An underwriter might ask to see proof that cash coming to the closing table is seasoned and not borrowed, or that deposits match the profit and loss statement. Quick access to financial docs makes it easy to clear this hurdle.
Update corporate documentation. While the entity formation may be of record, items like operating agreements, bylaws or resolutions, and member lists must be created and maintained by the business entity. Scrambling to find a lawyer to straighten out any omissions at the last minute can bump out the closing.
For example, underwriting may require a certificate of good standing, which typically is public record. But if the borrower forgot to submit the report, the mistake can take several days to cure. Failing to file a $10 report can lead to funding delays or even hundreds in lost income.
Another common glitch is losing the EIN confirmation letter. Like a Social Security number for an individual, the EIN is used to verify the business identity. Requesting a duplicate copy of that letter can take weeks.
At Boulder Equity Partners LLC, we offer a range of loan products, including quick-close bridge loans. We recently added our Short Money Loan Program, a hybrid bridge loan which melds lower perm loan interest with a shorter prepayment penalty. We are a nationwide lender for commercial real estate loans and fund on most property types.