Residential Transition Loans—A Primer

Residential transition loans (RTLs) are short-term bridge, construction, or renovation loans designed to help residential real estate investors purchase and renovate residential or small balance commercial properties, generally within 12 to 36 months. RTLs are similar to traditional mortgages in many aspects but may differ significantly in terms of initial property condition, construction draws, and the timing and incentives by which borrowers repay principal. The repayment of an RTL occurs closer to or on the loan's maturity date and is primarily based on a borrower's ability to sell the property or convert it into a rental.

-- The market for rehabilitation/renovation of existing homes has expanded in recent years for reasons ultimately related to tight housing supply.
-- RTL securitizations have been prevalent among various issuers in the U.S. since 2016, but they have been mostly nonrated. Toorak Mortgage Trust 2024-RRTL1, the inaugural rated RTL securitization, was issued in February 2024. Since then, eight other rated RTL securitizations have been issued to date, two of which haven't closed as of the date of this commentary.
-- Many of the credit drivers for RTLs are consistent with standard residential loans. However, there are RTL-specific variables that also affect probabilities of default.

"Historically, the RTL industry has been somewhat fragmented with variations in operational processes, lending approaches, and target borrowers. However, some aspects of this appear to be changing with the emergence of rated RTL securitizations and an expanded investor base," said Corina Gonzalez, Associate Managing Director, U.S. RMBS Ratings. "This trend toward standardization is a key turning point for a growing asset class, when word spreads and what was once a niche product gains mainstream acceptance."