What is a Bridge Loan?
What is a bridge loan? A bridge loan is a type of short-term loan which is used until long term financing can be put into place. The bridge loan is intended to bridge the gap between one type of financing and another.
Bridge loans are used when a property owner wishes to purchase a new property but doesn’t have enough down payment in order to obtain financing for the new purchase. The property owner can use a bridge loan to borrow against the equity in their current home for the purchase of their new home. Once the purchase of the new home is completed, the previous home can then be sold in order to pay off the bridge loan.
Bridge loan lenders will generally allow for financing up to 70% of the value of the homeowner’s property. If the property has previously existing mortgages, the remaining balance of the mortgages will be factored into the combined loan to value ratio of 70%. Bridge financing generally has a term of one year or less and bridge loan rates are higher than a conventional loan because of the increased risk associated with the scenario.
Bridge loan lenders are primarily concerned with the value of the property and the amount of equity the borrower has in the property and less concerned with the income and creditworthiness of the borrower. Since the residential bridge loan borrower is most likely attempting to obtain conventional financing for the new purchase it is important they are have sufficient income and credit scores.
Bridge loans are not always offered by traditional lenders such as banks and credit unions. However, bridge loans are very common with hard money lenders. If the borrower is in need of funds quickly, they will benefit from using hard money as it can be funded in much shorter time frame.
There are numerous different names for bridge loans. They can often vary by region or country but are essentially the same thing. Bridge loans are also known as swing loans, gap financing, caveat loan, bridging finance, bridge financing, bridging loans, interim financing or bridging loans.