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Bridge Loans

Have you ever heard about bridge loans? This is a type of loan that can fulfill your short term financing needs. There are many lenders, banks and financial institutions that offer bridge loans on a regular basis.

Bridge loans: An overview

A bridge loan is also known as a bridging loan in the United Kingdom. In some countries, it is named as a caveat loan or a swing loan. Bridge loans are short term loans that are typically availed for a repayment term which might vary from 2 weeks to 3 years. A bridge loan is basically a stopgap loan. It is taken when a larger amount of loan is yet to be approved or sanctioned.

Bridge loans are temporary financing options for a business or individual till the time long-term financing is available. These loans are costlier than traditional financing to make up for the extra risk of the loan. Bridge loans usually come with a higher rate of interest, costs and other charges that have to be paid back over a shorter repayment term. Different types of fees on bridge loans are charged by the lenders. They might also ask for a smaller loan to value ratio and cross-collateralization. In contrast, these loans are usually arranged faster with comparatively less paperwork.

You should always remember that a bridge loan is meant for a short term period.

Bridge loans in real estate

Bridge loans are frequently used by commercial real estate companies for the following purposes:

  1. Recovering real property from foreclosure
  2. Closing on a real estate
  3. Making the most of a temporary opportunity for getting permanent financing

When a bridge loan is taken on a property, it is repaid while the real property is sold off, refinanced with a conventional lender, the trustworthiness of the borrower comes to a better condition, the property is constructed or upgraded or there is a particular upgradation or modification that permits a long term or successive round of mortgage financing to take place. The problems of timing might occur with various stages of the project with various fund requirements, risk probabilities and capacity to get financing.

A bridge loan has some common characteristics of a hard money loan. Both are nonconforming loans secured for temporary financing requirements. A bridge loan is different from a hard money loan in that the term bridge loan denotes the duration or term of the loan and the expression hard money loan denotes the source of lending. Loan to value ratios (LTVs) of bridge loans usually don’t surpass 80% for residential real estate and 65% for commercial real estate and this is decided on the basis of the appraised value of the property.

Availability of real estate bridge loans

Majority of banks are not willing to provide real estate bridge loans due to the risky characteristics of these loans. Absence of proper documentation is one more element that doesn’t suit the lending requirements of the bank. These loans are also used in corporate finance and venture capital for various intentions.



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