Also known as interim loans, bridging loans are short-term loans that are taken out by companies and individuals to literally bridge transactions, for example, a homeowner may take out a bridge loan as a downpayment on a new home while waiting to sell their old one.
Being a short-term loan means a borrower needs to repay from six months to one year, often at interest rates that are two points higher than the standard. Bridging loans are used regularly in business and real estate.
In a business scenario, a company secures a bridge loan to meet current obligations while waiting for permanent financing. For example, if Business A expects equity financing to close in six months, it may need to use a bridge loan to cover ongoing business expenses like salaries, inventory, rent, utilities, and other expenses until long-term financing arrives.
In real estate, a bridge loan is used to buy a new property while waiting for the old one to be sold. Homeowners who are keen on moving houses as soon as possible can secure this type of loan, however, it’s not without its risks. Aside from the short terms of payment and high-interest rates, there is also a large sum of origination fee to be paid. Also, in a robust real estate market where houses are sold quickly, a borrow could be charged an early payment penalty.
Not all people can qualify for a bridge loan. Lenders usually only extend it to borrowers with high credit scores and high income to debt ratio, with high being in favor of income. But feel free to check with different lenders to see if you qualify.
Definitely, anyone who is thinking of applying for a bridge loan should think about other loan options. For real estate, there is always the home equity loan. A home equity loan is cheaper and the terms are less stringent, however, lenders typically do not extend it if the property is already listed on the market. Still, homeowners whose homes are not yet listed should explore the two options and compare them. To recap, a home equity loan is cheaper, however, a bridging loan does not in any way affect, or is affected by, the first home.
Still, borrowers should take a more cautious approach to bridge loans and seek the advice of professionals to explore other options.