Bridge loans

Bridge Loans

A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. It is usually called a bridging loan in the United Kingdom, also known as a "caveat loan," and also known in some applications as a swing loan.

Overview

Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower's creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding.

A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term or unusual circumstances. The difference is that hard money refers to the source of funds - a hard money loan is a loan secured by the promise of a future sale or other form of financing, once the future financing is secured, then the hard money loan is paid off.

Types of Bridge Loans

There are two types of bridge loans for home mortgages. In the first, the borrower takes out a bridge loan to cover the down payment on the new house, then pays off the loan when they sell their old house. In the second, the borrower takes out a bridge loan to pay off the old mortgage, then pays off the bridge loan with the proceeds from selling the old house.

Risks and Benefits

The main benefit of a bridge loan is that it allows the borrower to avoid a contingent offer and makes it easier to move into a new house before selling the old one. However, the main risk of a bridge loan is that the borrower's old house may not sell as quickly as expected, which would leave the borrower with the burden of paying two mortgages.

See Also

• Hard money loan
• Mortgage loan
• Real estate