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Bridge Loans

What is a Bridge Loan

Bridge loans are designed for short term financing. Bridge loans buy the borrower time to secure long term financing and allow borrowers to meet their debt obligations as this loan type offers immediate access to capital.

Benefits

  • Faster application
  • Faster approval process
  • Faster access to funding
  • No repayment penalties
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Negatives

  • High interest rates
  • Short term
  • High origination fees

Requirements

  • High credit scores
  • Low debt to income ratios

When do you need a bridge loan?

When homeowners sell one home to purchase another. Typically, they use their previous homes equity to purchase their new home. When the closing dates for the sale of an old home and purchase of a new home don’t align forces the buyer to look for a short-term financing option such as a bridge loan. Bridge loans help home buyers secure a property when they don’t have the equity needed to purchase the home. Another situation where a borrower would need a bridge loan is when a loan is about to mature, and the borrower needs capital to meet his debt obligations.

Why do most home buyers turn to bridge loans?

A homeowner looking to sell his property is more likely to choose a buyer with a contingency-free offer. Contingency-free offers mean that the buyer doesn’t need to sell his current home to be able to purchase the property. This makes a seller more likely to choose a buyer as it makes the closing process significantly faster.

Example

Microsoft is looking to purchase a building that is in high demand. In order to secure the deal and acquisition, Microsoft took out a bridge loan to get immediate access to the capital needed to purchase the building. Although, this is a short-term solution, this bridge loan has now bought Microsoft time to secure and negotiate long term financing for the acquisition.