Bridge loans have nothing to do with buying bridges. A bridge loan is a form of short-term or interim financing providing a “bridge” between one situation and another. It can be used by an individual or business until permanent or the next stage of financing can be obtained.
They are often used by real estate investors to quickly close on a property in order to take advantage of a short-term opportunity such as a property in foreclosure or about to be foreclosed. Typically bridge loans on a property are repaid when the property is refinanced with a traditional lender, or the property is sold quickly i.e. “flipped” for a quick profit.
Often bridge loans are arranged with a hard money lender who charges higher interest rates than a typical bank in exchange for a quick turn around and simplified paperwork. Hard money lenders are often individuals with spare cash looking for better returns than are available in more traditional investments, although there are also companies that specialize in bridge loans as well. Bridge loan interest rates are often 1% per month with terms of up to 12 months. In addition, 2–4 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value.
Bridge loans are frequently used in real estate transactions. For instance someone needing to purchase a new home may take out a bridge loan to make the downpayment on a new home while they are waiting for the closing on their current home. The expectation would be that the proceeds from the sale of the current home will repay the bridge loan shortly after the closing on the new home.
Another case where they might be necessary is in the purchase of a home sold at auction or foreclosure where the timeframe for closing is shorter than is possible with a traditional loan.
A bridge loan may also be used by developers in the early stages while they are seeking permit approval. Due to the uncertanty of project approval the loan might be at a high interest rate and from a specialized lending source that will accept the risk. Once the permit is approved the developer can obtain a conventional construction loan.
Bridge loans are also used in corporate finance to ensure continued smooth operation during a transition period such as while a stock offering is being prepared. It can also be used to carry a distressed company through a period while it is searching for a new owner or while one partner attempts to buy out another partner.
Bridge loans may be “closed” or “open”. A “closed” bridge loan , is available for a fixed period and must be repaid at a predetermined time. While an “open” bridge loan has no fixed payoff date.
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