A bridge loan can be considered as a short term loan that is used by a person or a company in order to meet his current financial need. This bridge loan is taken by a person or a company until he is able to get a permanent financing alternative. As the name suggest, it bridges the gap between times when financing is needed. It is also known as “interim financing” or “gap financing”.
A short term loan can last up to one year. The interest rates are high on these loans and they are normally backed by collateral (such as real estate) or it can also be backed by inventory. In my opinion, a bridge loan is definitely more expensive than conventional financing due to the high interest rate involvement. But a bridge loan can be arranged quickly with less documentation formalities.
It is basically a sort of temporary financing for an individual or a businessman until a permanent financing arrangement is obtained. For example: you have a desire to buy a house. Hence with the help of a real estate agent, you start hunting for a house and arrive at a suitable choice. But the only problem is that you need to sell your present house in order to buy that new house.
In such a situation, taking a loan comes to your rescue. You must have enough equity in your present home which will then qualify you to get some cash so that you can make a down payment and buy the concerned new house. As there can be a time lag between the sale of one property and the purchase of another, a bridge loan allows a home owner to enjoy the benefit of flexibility.
The loan helps you to make an advance payment in order to get yourself good deals for a new house. Bridge loan facilitates quick investment once a borrower opts for it, he then can make a payment for his current mortgage and the remaining funds can be used towards making of advance payment for the purchase of a new house. Once the old house is sold, the borrower will use the funds to reimburse the bridge loan.
The borrower who gets the amount does not have to pay interest if the house is sold within the time period of six months. If the house does not get sold out within six months, then the borrower only have to pay for the interest on the loan amount. A bridge loan is normally used for commercial real estate purchases to quickly close on a property, release a real estate from foreclosure or just take an opportunity of a short-term loan for securing a long term financing goal.
A bridge loan is often used by developers in order to carry on a project during the process of approving the project. Most banks do not offer the facility of real estate loans. The main reason is because of its speculative nature, risk involved and lack of full documentation which do not fit within the bank lending rules. In such adverse circumstances a bank will have to then justify its lending practice offered to its investors. Hence, bridge loans are often offered from individuals, investment pools and businessman that involve in higher interest loans.