Bridge loans are short-term, intervening financial assistance for people who need to keep up with payments for property until a more permanent, or another stage of financing means is acquired. The money from the consequent financing source is then used to repay the loan.
This option of obtaining temporary financial support is more commonly used in the real estate business. Here the loan is used the means for tiding over on the mortgage of a new home while the previous one is either currently in the process of being sold, or still not put up on the market for sale.
Bridge loans may be used to quickly close on an existing property, to tide the time gaps between long-term financing opportunities, or, as a last resort, to save a property from being foreclosed.
Bridge loans are of great help to those who are in urgent need of funds to close on a new residence so that the current home can also close on the contract of sale. This requirement is usually the main reason why most people avail of the bridge loan. There are two types of this kind of loan: closed loans are for those whose contract for the sale of the property have been signed, and have pushed through.
This type is usually easy to acquire, since the lender has relatively fewer risks. A set-up fee is required before processing, and the interest on the loan is paid in bulk when the funds from the sale of the property come in. Open loans are for those whose property have not been sold yet, or the contract for the sale is still under negotiation.
This type of loan is difficult to acquire, unless the borrower has an exemplary record at the bank, or he can offer other collateral besides the property which is being sold.
Because of the risks involved on the part of the lender, the rates for the open loan are naturally higher than the closed loan. This loan can become complex, as the lender may even require the borrower to put up his new home as security for the loan, in case he does not have any other collateral to put up.
The risks involved in the approval of bridge loans due to its speculative nature has caused banks to hesitate, if not pull back completely from offering bridge loans as an alternative financing method. The terms of the loan do not complement most banks’ lending criteria, and it may encounter difficulties in justifying the practice to investors and government assessors.
Bridge loans are more readily available from individual lenders, investment pools, and business outfits which are specifically put up for the purpose.
In applying for the approval of a bridge loan, the lender usually will ask for a copy of the mortgage offer on the new property, the terms and details of the agreement, and further supporting proof of the status of the current home on the market (whether or not it is really up for sale).
It may also require the borrower to state how he is planning to meet with interest payments on the loan, or the other options he is considering in case the sale of the house won’t push through as planned. For open bridge loans the lender will usually put a year’s limit before repayment; as long as the interest rate for the period is paid, and the property market has dipped, the lender is willing to renegotiate terms.