Bridge Loan

A bridge loan is short-term financing, usually 6 to 24 months, that covers a property until longer-term financing can replace it. Investors use one to buy or renovate a property that does not yet qualify for a DSCR loan, then pay it off with a DSCR refinance once the property is rented.

Bridge lenders size the loan on the purchase price, the rehab budget or the after-repair value, not on rent. Many are interest-only, and the rate and fees run well above a permanent loan. A vacant house or one that needs work has no rent to cover a payment, so it cannot produce a DSCR at all.

The exit is the DSCR loan. Once a tenant is in place, the new lender divides the lease rent by the full payment on the new loan. If that ratio falls short, the refinance is smaller than planned and the borrower brings cash to pay off the bridge. Run the target refinance through the calculator before closing the bridge loan.

Further reading: Bridge Loan on Wikipedia.