Between the time you are about to get funded and the time that you actually have to make a payment, there might be too big a gap. In this gap, you can get funded for a short-period. Such funding is called a bridge loan. .
Theoretically a bridge loan can be used for any purpose. But bridge loans are definitely more common in real estate funding. Here the loan is used the means for tiding over on the mortgage of a new home while the previous one is either currently in the process of being sold, or still not put up on the market for sale.
Prevention of foreclosure as well as making a payment for purchase are two of the most common uses of bridge loans.
Bridge loans are of great help to those who are in urgent need of funds to close on a new residence so that the current home can also close on the contract of sale. This requirement is usually the main reason why most people avail of the bridge loan. There are two types of this kind of loan: closed loans are for those whose contract for the sale of the property have been signed, and have pushed through.
Closed loans present a lender a lower risk, and as a result closed loans are more common. A set-up fee is required before processing, and the interest on the loan is paid in bulk when the funds from the sale of the property come in. Open loans are for those whose property have not been sold yet, or the contract for the sale is still under negotiation.
Open loans are difficult to come by, unless they are based on a long standing relationship with the lender.
Because of the risks involved on the part of the lender, the rates for the open loan are naturally higher than the closed loan. This loan can become complex, as the lender may even require the borrower to put up his new home as security for the loan, in case he does not have any other collateral to put up.
Many banks no longer want to take the risk of bridge financing. The terms of the loan do not complement most banks' lending criteria, and it may encounter difficulties in justifying the practice to investors and government assessors.
Though banks are frowning on them, there are specialist lenders who like to give bridge financing.
In applying for the approval of a bridge loan, the lender usually will ask for a copy of the mortgage offer on the new property, the terms and details of the agreement, and further supporting proof of the status of the current home on the market (whether or not it is really up for sale).
The borrower has to completely reveal her or his plans and only then is there a hope for bridge financing. Even if the property market goes in for a nosedive, the lender of an open loan will want to see the periodic payments come in for a year. After that, they may be willing to re-negotiate.
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