A bridge loan is just that. That is, it bridges the time between your real and acute need for money, typically to prevent foreclosure, and the time you are going to get financing. The money from the consequent financing source is then used to repay the loan.
The world of real estate financing has been the most common consumer of bridge loans. 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.
There might be an opportunity that you might not want to miss out on. This is where a bridge loan becomes helpful. Additionally preventing a foreclosure is a common use too.
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.
Since the sale is already concluded the lending company or bank enjoys a higher degree of security. 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.
Naturally, if you have an impeccable record with a lender, you could get an open loan, but otherwise it is going to be tough.
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.
Bridge financing as an alternative mechanism for funding is on a decline as banks are refusing to assume so much risk. 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.
Despite traditional lenders moving away from bridge financing, there are many who would still be willing to grant you such finance.
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).
Committing to a payment plan as well as listing out alternatives in case the sale of the house does not go through, are just some of the matters that the borrower has to commit to. Do not assume that you can “cry your way to the bank.” Even if the market collapses, you will have to repay your bridge loan.