Understanding Residential Transition Lending
A Double-Edged Sword
by Radian Real Estate Management
Residential Transition Loans (RTLs), also known as fix-and-flip mortgage loans, are short-term bridge, construction or renovation loans designed to help real estate investors looking to purchase and renovate properties.
The primary advantage of RTLs is in their speed and efficiency over traditional lending processes. According to National Lending Pro, RTLs can provide funding within a week whereas traditional loans can take 30-45 days. Quick funding helps to allow investors to act on properties in hot markets.
RTLs offer flexibility conventional mortgages can’t match. These loans often consider the property’s potential value after renovation rather than its current condition, making them ideal for properties that may not qualify for traditional financing. Some RTL lenders also provide interest-only payment options during the renovation phase.
These advantages come with considerations. Interest rates are typically higher, ranging from 7% to 15%. If a renovation takes longer than expected or market conditions shift unfavorably, these higher rates could affect potential profits.
Also, borrowers must repay the entire loan amount when they (1) sell the property with the goal to generate a profit or (2) refinance to a term loan and rent out the property to earn income.
Investors must also consider the specific underwriting criteria of RTL lenders which includes substantial down payments, detailed renovation plans and timelines, and proven experience in similar projects. While protecting the lenders underlying capital, they can create barriers for newer investors or those with limited cash.
Entering the RTL space can be both rewarding and risky. As a Morningstar DBRS acceptable due diligence provider, Radian Real Estate Management provides lenders in this space with confidence to help with diligence requests, draw reviews, and valuation services provided by homegenius Real Estate.
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