Bridge Loans: What the Exit Has to Look Like Before Anyone Funds One
You have a four-unit building under contract at $800,000. Two units are vacant, the other two are leased well below market, and no bank will touch it until the rent roll is full. A bridge loan gets you to closing. The question every underwriter asks before funding one is not “is this a good building?” It is “how does this loan get repaid in twelve months, and what happens if it doesn’t?”
That repayment is the exit. On a bridge file, the exit is the deal. Everything else is detail.
Easy Lending USA is a referral service, not a lender. We connect business entities with private capital sources for business-purpose loans on non-owner-occupied investment property. All figures in this post are indicative examples, not offers or quotes.
There are only two exits, and underwriting tests them differently
A bridge loan is short-term, usually 12 to 24 months, typically interest-only. It gets repaid in one of two ways:
- Sale. You sell the property and the payoff comes out of the proceeds. Underwriting tests whether the sale price, net of costs, clears the loan with room to spare.
- Refinance. You replace the bridge with long-term debt, most often a DSCR loan on a rental. Underwriting tests whether the new loan will be big enough to pay the bridge off.
The sale exit is judged on market evidence: comparable closed sales, days on market in the submarket, how many buyers exist at your price point. The refinance exit is judged on arithmetic. And the arithmetic catches more investors than the market does, because the constraint that binds is usually not the one they checked.
The refinance exit: DSCR sizes the loan, not LTV
Most investors plan the refinance on loan-to-value. The building will appraise at $1,000,000 once it’s stabilised, the takeout allows 75% LTV, so that’s $750,000, more than enough to repay a $640,000 bridge. Done.
Except the takeout lender runs two tests and gives you the smaller answer. The second test is the debt service coverage ratio: gross rent divided by the full monthly payment (principal, interest, taxes, insurance and any association dues). Many DSCR programmes want 1.20 or better for their stronger pricing tiers.
Here is the same building run both ways. The figures are indicative: a 7.5% 30-year takeout, $1,100 a month in taxes and insurance, and a stabilised rent roll of $7,200 a month.
| Test | Calculation | Maximum new loan |
|---|---|---|
| LTV at 75% | $1,000,000 × 75% | $750,000 |
| DSCR at 1.20, rent $7,200 | $7,200 ÷ 1.20 = $6,000 payment; less $1,100 T&I = $4,900 P&I | $700,800 |
| DSCR at 1.20, rent $6,600 | $6,600 ÷ 1.20 = $5,500; less $1,100 = $4,400 P&I | $629,300 |
| DSCR at 1.20, rent $7,200, rate 8.0% | Same $4,900 P&I at a higher rate | $667,800 |
Now add what it actually costs to pay off the bridge: the $640,000 principal plus refinance closing costs of roughly 2% of the new loan, about $14,000. You need around $654,000 out of the takeout.
At $7,200 rent and 7.5%, the DSCR test gives you $700,800. You clear the payoff with about $47,000 to spare. That is a fundable exit.
If the units lease at $6,600 instead, $600 a month short of the projection, the DSCR test gives you $629,300. You are about $25,000 short. You bring cash to your own refinance, or you don’t refinance at all. The appraisal never changed. LTV was never the problem.
Rate movement does the same thing more quietly. Hold the rent at $7,200 but let the takeout rate drift to 8.0% over your twelve-month hold, and the loan falls to $667,800. You still clear, but by about $14,000 rather than $47,000.
This is why a serious bridge underwriter stress-tests your rent assumption and your takeout rate, not just your value. Before you submit, run the DSCR test yourself at 90% of your projected rent and at a rate half a point above today’s. If the exit still clears, the file will read as credible. If it only works at full projected rent, expect a lower loan amount or a harder conversation.
The sale exit: what has to be true
A sale exit is judged on evidence you can point to, not on your projected price:
- Closed comparables, not listings. Three or more recent closed sales of similar product supporting your exit price. Active listings show what sellers hope for.
- Time to sell within the term. If the loan is 12 months and you need 6 months of work, the submarket’s typical days on market plus 30 to 45 days to close has to fit in what’s left. A 90-day marketing period on top of 6 months of work leaves almost no margin.
- Net proceeds, not gross. Take 6% to 8% off the sale price for commissions, transfer taxes and seller concessions before you compare it to the payoff.
What an extension actually costs
Every exit plan should assume it runs late. On the example loan, interest at an indicative 11% runs about $5,867 a month. A typical three-month extension might carry a fee of one point, $6,400, plus three more months of interest, $17,600. That’s around $24,000 for one quarter of delay, and some programmes require the loan to be current and in good standing, or a fresh valuation, before they grant it.
Read the extension clause in the term sheet before you sign, not when month eleven arrives. The questions: how many extensions are available, what each costs, and whether they’re automatic or at the capital source’s discretion.
When a bridge loan is the wrong call
- The refinance only works at full projected rent. If the DSCR test fails at 90% of your projection, you’re not buying a bridge loan. You’re buying a bet on lease-up with interest running.
- The property already qualifies for long-term debt. If it’s leased and the numbers work today, go straight to a DSCR or commercial loan. A bridge adds points and a second set of closing costs for nothing.
- The exit depends on the market improving. “Rates will be lower next year” or “prices will be up” is a hope, not an exit. Underwriters discount it to zero, and so should you.
- There’s no cash reserve for delay. If an extension fee plus three months of interest would strain you, the timeline has no slack in it and one late contractor turns into a default.
The short version
Before anyone funds a bridge, they want to see how it ends. For a refinance, that means a DSCR calculation at conservative rent and a stressed rate, showing a new loan that covers the payoff and closing costs. For a sale, it means closed comps and a timeline that fits inside the term with room to slip. If you can show either one plainly, the rest of the file gets easier.
See how bridge financing is typically structured, or submit your deal with your exit worked out and we’ll connect you with capital sources that fit it.