What is Bridge Loan?
A Bridge Loan is a source of short-term financing until the borrower secures long-term financing or removes an existing credit facility altogether. The short term bridge loan is backed by collateral, so the lender has the right to seize the underlying pledged asset in the event of default, which is the property financed by the mortgage in the context of real estate financing.
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How Does a Bridge Loan Work?
A bridge loan, or “swing loan,” functions as a short-term, temporary financing provided by the lender with the intention to retrieve the funds within six months to a year.
Short-term bridge financing loans are most common in the following two sectors:
- Real Estate Transactions: Bridge loans are a method to finance the purchase of a new home, or similar property, prior to selling the current residence.
- Mergers and Acquisitions (M&A): Bridge loans can be offered in a M&A transaction if the financing commitments needed for the deal to close are temporarily delayed.
In either scenario, the bridge loan is designed to provide near-term funding during a transitionary period.
The bridge loan closes the gap between the date of the new purchase (i.e. transaction close) and the date when permanent financing has been obtained.
Bridge Mortgage Loan Example
Under the context of real estate, bridge loans are utilized when the buyer has insufficient funds to purchase the new property without first selling the property still in their possession – i.e. that is currently on the market.
Typically, these types of short-term instruments are characterized by the following characteristics:
- Secured with Current Home Pledged as Collateral, i.e. Lien on Property
- 6-Month to 1-Year Lending Term
- Same Lender is Often Financing the New Mortgage
- Borrowing Ceiling of ~80% of Original Home’s Value
In effect, the temporary financing commitment offers homebuyers the opportunity to purchase a new house prior to actually selling their current home.