Quick overview
A bridge loan is a short-term mortgage-style loan secured by the property you buy and renovate. In fix-and-flip investing, the loan fills the gap between purchase and either the sale of the renovated property or conversion to a longer-term loan. Bridge financing speeds closings and funds rehab work that would otherwise delay a project while you arrange permanent financing.
In my practice as a financial advisor and mortgage consultant, I’ve seen bridge loans rescue deals that would have been lost to slower financing. That said, they add cost and risk: higher interest rates, origination fees, and shorter timelines mean a small delay can erase profit. Use them when speed is essential and the exit plan is realistic.
(For related reading on when to pick this tool, see When to Use a Bridge Loan for Property Renovations.)
Why investors choose bridge loans for fix-and-flip projects
- Speed: Many bridge lenders fund within days to a few weeks, faster than conventional mortgages.
- Simplicity: Approval often hinges on property value and exit plan rather than lengthy income documentation.
- Flexibility: Lenders can tailor draws for construction milestones and allow interest-only payments during rehab.
However, speed and flexibility come at a cost. Typical interest ranges and fees are higher than conventional loans and often include points, origination fees, and early-exit penalties.
Typical terms and costs (what to expect in 2025)
- Loan term: usually 6 months to 3 years.
- Interest rates: commonly 6%–12% for experienced investors; rates move with market conditions and borrower profile.
- Loan-to-value (LTV): 65%–90% of the after-repair value (ARV) or purchase price, depending on lender and deal quality.
- Fees: origination fees (1%–3%), underwriting fees, draw fees, and sometimes appraisal and inspection costs.
- Payment structure: often interest-only monthly payments or deferred interest rolled into the payoff.
Regulatory and market conditions can change these figures. The Consumer Financial Protection Bureau provides general guidance on high-cost loans for consumers; investors should read lender disclosures carefully (CFPB: https://www.consumerfinance.gov).
How lenders underwrite a bridge loan for a flip
Lenders focus on three things:
- Collateral (the property and its ARV). Many lenders prefer experienced flippers and will underwrite against ARV rather than current purchase price.
- Exit strategy. Typical exits are sale after rehab or refinance to a permanent loan. Lenders require a clear timeline and proof you can complete the work.
- Borrower track record and liquidity. Credit matters, but proof of flipping experience and reserves can weigh more than FICO alone.
Typical documentation includes a purchase contract, scope-of-work and budget, projected timeline, and an ARV appraisal or comparable sales analysis.
Common exit strategies
- Sale after rehab (the classic flip): repay the bridge loan at closing from sale proceeds.
- Refinance into a long-term mortgage: used when the investor wants to hold the property as a rental.
- Bridge-to-perm: some lenders offer a bridge that converts to a permanent loan if conditions are met.
A failed exit is the primary risk for bridge loans. If the market softens or renovations take longer/cost more, carrying costs and higher rates can erase profit.
Step-by-step checklist for using a bridge loan on a fix-and-flip
- Confirm the deal math: purchase price + rehab + holding costs + fees + loan interest < expected sale price (with margin). Build a 10–20% contingency for surprises. In my practice, I insist clients run a conservative sensitivity analysis before borrowing.
- Line up your lender early: get pre-approval or a term sheet so you can move fast when you find a property.
- Present a detailed rehab budget and project timeline to the lender. Lenders may release funds in draws tied to inspections.
- Understand all costs: interest, points, appraisal, closing costs, draw fees, and exit fees.
- Monitor rehab progress aggressively: missed milestones can trigger funding delays or penalties.
- Prepare exit documents: list the property early, plan marketing, and be ready to refinance if needed.
Real-world example (illustrative)
An investor buys a distressed property for $300,000. Expected ARV after $50,000 renovations is $450,000.
- Bridge loan: 75% ARV → max loan = $337,500. The borrower covers the $12,500 gap plus renovation cash or secondary financing.
- Loan cost: 9% interest, interest-only monthly payments, and 2 points origination fee. On a 4-month flip the interest cost + fees may total roughly $12,000–$15,000.
- Sale price of $450,000 repays the loan; after paying rehab, fees, and selling costs the investor realizes profit. A longer hold or lower sale price would reduce or eliminate profit.
This mirrors many cases I’ve handled: the bridge loan made a time-sensitive purchase possible, but strict budgeting and tight project management preserved the margin.
Bridge loans vs alternatives (short comparison)
- Hard-money loans: also quick, often lender-funded by private investors; may have higher rates but flexible terms for riskier deals.
- Construction loans: used for ground-up builds; structured differently with staged draws and usually require more documentation.
- Conventional mortgages: cheaper over the long run but slower to close and stricter on borrower underwriting.
- Home equity lines (HELOC) or cash: cheaper but require existing equity and may not close fast enough for a competitive purchase.
For a quick purchase with immediate rehab needs, bridge or hard-money lending are common choices for flippers.
Tax and accounting notes (basic, non-tax advice)
Interest on loans used for investment property rehabilitation is generally an ordinary business expense and may be deductible if the property is held for investment or business (see IRS guidance on business/investment interest expense). Recordkeeping is critical: document loan agreements, interest payments, and rehab costs. Consult a tax professional for specifics and any 2025 updates to tax law.
Risks and how to mitigate them
- Market risk: falling home prices can turn a profitable flip into a loss. Mitigation: conservative ARV estimates and contingency reserves.
- Construction overruns or delays: keep experienced contractors and weekly progress checks.
- Refinancing risk: have alternative exits (other lenders, or a plan to reduce scope to sell quicker).
- Cost risk: factor in holding costs, taxes, insurance, and selling costs.
Professional tips
- Build lender relationships before you need them. Having a pre-existing line or an approved lender shortens closing time.
- Get multiple term sheets and negotiate points and fees—small percentage differences matter on short-term loans.
- Use project management and a detailed draw schedule to reduce financing friction; lenders prefer objective inspection-based draws.
- Keep contingency funds (10–20%) separate from budgeted rehab money; I require clients to have liquid reserves before closing.
Common mistakes to avoid
- Ignoring the full cost of borrowing: include all fees, not just the interest rate.
- Overpaying for a property because you can close quickly. Fast financing doesn’t justify poor deal math.
- Failing to document the exit. Lenders will want a clear, documented plan.
Resources and further reading
- Bridge Loans Explained: Uses, Costs and Exit Strategies (FinHelp) — a deeper glossary entry with lender terminology and sample term sheets: Bridge Loans Explained: Uses, Costs and Exit Strategies
- When to Use a Bridge Loan for Property Renovations (FinHelp) — guidance on choosing between bridge and other short-term options: When to Use a Bridge Loan for Property Renovations
- Consumer Financial Protection Bureau — general consumer protection info on loans: https://www.consumerfinance.gov/
- IRS — guidance on business and investment interest (consult a tax pro for your situation): https://www.irs.gov/
Professional disclaimer: This article is educational and reflects my professional experience in financial advisory and mortgage consulting. It is not individualized legal, tax, or investment advice. Consult a licensed attorney, tax advisor, or lender before making lending decisions.
