Understanding Bridge Loans

A bridge loan is a short-term financing product (typically 6-24 months) that "bridges" a gap between the property's current state and a long-term financing solution. Bridge loans are used when:

• The property is being purchased and needs stabilization before it qualifies for permanent financing
• The investor needs to close quickly before conventional or DSCR financing can be arranged
• The property is transitioning (vacant to occupied, light rehab to rentable)

Bridge loans are offered by hard money lenders, private equity funds, and some banks. They carry rates of 9-14%+ and typically include origination fees of 1-3 points.

Understanding DSCR Loans

A DSCR loan is a permanent, long-term (30-year) loan for stabilized rental properties. It's the "destination" financing — what you put a property into when it's rented and cash-flowing. DSCR loans are not designed for distressed or transitional properties.

Why You Can't Use a DSCR Loan to Buy a Distressed Property

DSCR underwriting requires:

• The property must be in rentable condition (or very close to it)
• An appraiser must determine market rent (which requires comps and a rentable property)
• The DSCR ratio must be calculable using current market rents

A property that needs $80,000 in renovation before it can be rented doesn't fit this model. The appraiser can't determine a meaningful market rent for a property with no functional kitchen or structural issues.

The Bridge-to-DSCR Sequence

The standard investor playbook for value-add deals:

1. Acquire with bridge/hard money — Close quickly, fund renovation draws
2. Renovate — Complete improvements, bring property to rentable condition
3. Stabilize — Place tenant, establish rental history
4. Refinance into DSCR — Pay off bridge loan with 30-year DSCR at a much lower rate

This sequence allows investors to acquire properties that couldn't qualify for DSCR loans initially, improve them to qualify, and then lock in long-term financing.

Key Differences

• Term: Bridge = 6-24 months; DSCR = 30 years
• Rate: Bridge = 10-14%+; DSCR = 7.5-9.5%
• Property condition: Bridge = distressed ok; DSCR = must be rentable
• Purpose: Bridge = transition financing; DSCR = permanent hold financing
• Rehab funding: Bridge = includes renovation draws; DSCR = no rehab component

Seasoning: How Long Do You Wait to Refi into DSCR?

After completing a renovation and placing a tenant, when can you refinance the bridge loan into DSCR? Options:

• Delayed financing — If you used all cash to purchase initially, some DSCR lenders allow immediate cash-out refi (30+ days after purchase)
• Standard seasoning — If you used a bridge loan for purchase, most DSCR lenders require 6-12 months of title seasoning before a standard cash-out refi
• Rate-and-term refi — No seasoning required for rate-and-term; can refi out of bridge immediately if no cash is being pulled out