In 2024, private lenders are witnessing an unexpected uptick in bridge and DSCR loan activity, reflecting growing investor demand for flexible financing options and market uncertainty.
DEFINITION REVIEW
First, let's make sure there is a clear understanding of definitions.
A bridge loan is a short-term business purpose loan that is generally secured by a 1-4 residential property. It has many names: fix and flip, NonQM, RTL (Residential Transition Loan), ground up construction, private lender loan, and even that oh-so-dirty phrase "hard money loan."
Technically, RTL is probably the most accurate description because the asset is almost always residential and the purpose is transitionary in nature: improving the property to rent or sell (fix and flip) or obtaining short-term financing for a rental property hoping long-term interest: rates go down, and obtaining permanent financing (true bridge). For this article, any loan with a duration of 36 months or less (usually 12 months) that generally contains interest-only payments will be considered a "bridge" loan.
DSCR stands for Debt Service Coverage Ratio. There are many ways to underwrite a loan. The traditional conventional credit market looks almost exclusively to the credit worthiness of the applicant by using FICO scores as wen as the applicant's ability to repay the loan.
In traditional commercial real estate lending, however, a lender looks to the debt service coverage ratio of the property as the predominant underwriting factor. This
formula divides the income of the property by the monthly payment obligation of the debt (including property taxes and hazard insurance impounds) and uses that number as the primary factor in determining the safety of the loan. For example, if a property produced $1,000 a month of income and the monthly debt service of the property was $800, the property would be a DSCR of 1.25 ($1,000/$800). Unlike bridge loans, which have a term duration of 36 months or less, DSCR loans are typically 30-year permanent financing products similar to conventional mortgage loans, except the end user is a real estate investor rather than an owner-occupant.
Sl6NIFICANT RISIN6 LOAN VOLUMES IN BRID6E AND DSCR LOANS
One of the most notable trends of the past year, and one that was quite honestly unexpected, is the sharp increase in loan volumes for both bridge and DSCR loans. In 2024, the demand for these loans rose significantly, driven by real estate investors seeking flexible financing.
BRIDGE LOAN VOLUMES. When isolating out the same users from 2023 and 2024 (i.e., removing any new user who started using Lightning Docs after Jan. r, 2023) we track124 unique lenders. Their bridge loan volumes surged by 30% year over year comparing the first three quarters of 2023 and 2024 (see Fig. 2). This upward trend indicates real estate developers and investors are leaning on these loans to seize opportunities and meet project demands without traditional financing delays.
DSCR LOAN GROWTH. Even though interest rates remained fairly consistent in the first two quarters of 2024, DSCR loan volumes also saw substantial growth, with a 41% increase in volumes comparing first quarter 2023 with first quarter 2024 (see Fig. 3).
When comparing the first three quarters of 2023 and 2024 together, there was a dramatic increase of 37% year over year. This spike reflects the growth of rental property investments; many landlords and investors continue to see these loans as viable options to scale rental portfolios, particularly amid rising rental demand and low housing inventory in several markets (see Fig. 4).
By Nema Daghbandan, Esq.
Private Lender, The Official Magazine of AAPL
Winter 2025, p. 20-30
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