What is a bridge loan?
A bridge loan is a short-term loan that individuals, investors, and companies use until they achieve their long-term financing. Bridge loans help investors to meet their short-term financial obligations. Usually, a bridge loan is under one year and may be subjected to high interest.
Example of a bridge loan
There are times when a person can be forced to renovate a house due to a natural disaster, for example. Since this is a sudden problem that requires quick cash without enough time to secure a mortgage; the owner can get a bridge loan that will cover the first phase of the renovation. The borrower can use this short-term loan to pay contractors while waiting for the big loan application approval.
Another good example is when a buyer wants to use their old house to finance a new one. Most of the time sellers put their old house on market and start looking for a new one right away. In a perfect world, they can sell the old one and buy a new one at the same time.
Unfortunately, this is not always the case. Sometimes a seller can find a great home before their old one is sold. How would the buyer close on a deal without selling their old one? Instead of losing the house, the buyer can get a bridge loan to cover the cost of the new home while waiting to sell the old one. Once the old house is sold, they can pay the bank right away.
Note:
Not everyone can qualify for a bridge loan. Due to high interests associated with the short-term loans, banks will only lend to highly qualified borrowers. Usually, a good credit score and credit history will be used to determine the worthiness of the borrower.
In addition, the borrower must have enough income to cover the loan payment in the meantime.
