Here’s how to model a bridge loan in the most accurate way possible in your underwriting model.

Step 1: Determine Loan Amount

Bridge lenders will most likely tell you as the borrower they will lender at a certain LTC percentage. 60% to 75% LTC is most common.

LTC = Loan Amount / Project Costs

Bridge loans allow the borrower to include capex into the loan. Some lenders even allow closing costs or other soft costs to be included in the loan as well.

This model has a ‘blank’ section to where you can include other miscellaneous costs, if needed.

As you can see above, 100% of the capex budget and 50% of the closing costs are being financed. The total loan amount of $7.4M comes out to be a 60% LTC bridge loan.

Important: 

Use an underwriting model that has a construction draw schedule. Meaning, your acquisition loan gets funded at closing and you only pay interest on the capex portion based on your renovation timing assumptions (like a real bridge loan).

Step 2: Interest Rate & Rate Cap

Bridge loans are most commonly floating interest rate loans, but can also have fixed interest rates. Use a model that has both fixed and floating rate features so that your projected interest rate can be as accurate as possible.

The lender spread is the interest the lender is charging on the loan (how they make a return on their capital).

Some bridge lenders may or may not require the borrower to purchase a rate cap. In the example above, you can see we have a rate cap with a 5% strike rate for the first 24 months, then the interest rate will go back to the lender spread + index.

Step 3: Terms and Fees

Lastly, it’s time to input the exact terms of the loan and any fees you may incur.

Input the months of interest only, years of amortization, and any financing/exit fees the loan will have.

Related Blog: Bridge Loans: What You Need to Know

Related Blog: 3 Critical Items on Every Lender Term Sheet

Whenever you’re ready, be sure to check out the Next Level Value-Add Underwriting model. Use this to underwrite bridge loans, Fannie/Freddie, bank, and loan assumption deals like no other model out there!

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