Individuals and companies face circumstances that may require urgent financial intervention, and the real estate industry is not an exception. With many financial companies having a long process of approving funds, the question becomes how best one can solve immediate problems. One of the most sustainable ways of doing this is to apply for a bridge loan. A bridge loan is also known as a swing loan, gap financing, or interim financing. The average time for a bridge loan is six months to one year.
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So, what is a bridge loan in real estate?
What is a bridge loan in real estate
The term bridge loan refers to a short-term loan which an individual or a company can apply in order to secure financing later on. There are several scenarios where the bridge loan comes in handy. To start with, the bridge loan is normally used when one desires to remove an existing obligation which may not wait. This is when one needs financing, but one finds that the funds are not yet available for use.
Second, when a homeowner is looking for a new home, when waiting for the current home to sell, he or she may apply for a bridge loan to sell. This is more so when one takes a very long time to get a buyer for the home. In this case, the bridge loan becomes the down payment for a new home.
Third, a career transition may warrant that you get a new home. In such a case, and due to time constraints, one may require funds urgently. A bridge loan comes in handy in this situation, and is a viable and sustainable intervention.
Having stated that, a bridge loan gives one a peace of mind as he or she looks for a permanent financial solution. One is able to get some cash flow especially at the transitional period.
Individuals and companies should be aware that a bridge loan carries high interest. In addition to that, many financiers would ask the applicant to give a collateral of the bridge loan. In many cases, the current home is the collateral. Similarly, the terms of payment for a bridge loan may vary drastically. For example, one may be required to make a lump-sum payment, or one may be required to make monthly payments.
One should bear in mind that the interest rate for a bridge loan is above the prime rate. At the same time, the loan could incur original fees and the closing costs.
Just like conventional mortgages, the loan applicant for the bridge loan will need to show an ideal credit score, and a good record in financial discipline.
Though a bridge loan is very common in real estate, it is also used in another situation. The lender can customize the bridge loan so that it can fit in other situations as well. Overall, the real estate industry offers immense opportunities for both the short term and long-term financing.