Bridge Loan

A bridge loan, also known as "gap financing", is used by an individual or business for purposes of short term financing needs in lieu of obtaining permanent financing.  Bridge loans allow the borrower to respond to situations that require immediate capital such as buying a new house or funding a critical business need such as an acquisition, restructuring, bankrupcy, foreclosure, or other timely purchase.  These loans are secured by collateral and funding by the bank is much faster and has less paperwork and other underwriting guidelines associated with it.  Collateral can come in the form of assets such as equipment, stocks, real estate, or even a companies accounts receivables.

Bridge loans will typically have terms that last anywhere from 1 month to 3 years and have much higher interest rates than traditional loans due to many of the high risk characteristics that go along with issuing the loan.

Many times, bridge loans are used by borrowers to when they purchasing a property.  It can serve as a down payment for the new home in the situation where the buyers current property has not sold.  Being that bridge loans have lower requirements, LTV ratios, FICO scores, and DTI ratios are not as important; banks take more of a discretionary view.  You may ask why one wouldn't tap the equity in their existing home through a HELOC, to finance the down payment for the new home.  Many bank frown upon this and will not allow a buyer to take money out of a house that is for sale to apply it toward a new purchase.  

Bridge loans provide the buyer with an advantage in terms of allowing them to jump on a great bargain.  The buyer will use this loan to get into the property and then refinance it at a later date with better terms when their existing property sells.  The tradeoff, however, is that the closing costs, interest expenses, and other fees can run quite high for a temporary loan.  Secondly, if the buyer is carrying the existing property along with the bridge loan, the loan terms will not be favorable on the new property.  For this reason, most buyers will refinance their new home once the existing one sells and this will be another expense. 
Tim Ord
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