What is a Bridge Loan?

Definition of a Bridge Loan

Bridge Financing is also commonly referred to as Interim Mortgage Financing.

A bridge loan is a short term, temporary loan, to cover a borrower’s down payment for a short duration when closing dates between two real estate transactions have not been synchronized. The bridge loan will be paid upon the closing of the last real estate transaction. A bridge loan is also referred to as interim financing.

As much as those in the real estate industry attempt to coordinate real estate closings to accommodate the buyer and sellers, it is not always possible. When the sale of buyers current home is set to close AFTER the possession date of their new home, a bridge loan will be required to temporarily supply the proceeds of the sale that would have made up the buyers down payment. The lender providing the buyer with the new mortgage typically provides the bridge loan but on occasion, the financing is provided by a second lender if the primary lender does not offer bridge financing.

Example

Mr. McGillicuddy is purchasing a home for $300,000 from Mrs Danforth, of which $250,000 is financed through a first mortgage. The down payment of $50,000 will be from the proceeds of the sale of Mr. McGillicuddy’s original home. A closing date for Mr. McGillicuddy’s purchase is August 31, but the sale of Mr. McGillicuddy’s original home cannot be closed until September 30. Mrs Danforth cannot wait until September 30 to close the transaction.

Mr. McGillicuddy’s lender agrees to provide a 30 day bridge loan of $50,000, the proceeds of which will be paid to Mrs Danforth on August 31, along with the proceeds of the $250,000 mortgage, to permit Mrs Danforth to be paid in full at closing. When the sale of Mr. McGillicuddy’s original home is closed on September 30, of the proceeds is used to pay off the $50,000 bridge loan, plus any interest accruing in the 30 day period.

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Advantages of a Bride Loan

Though a buyer will be required to pay additional interest and fees for a bridge loan, it has the advantage over the alternative of losing a purchase if possession dates cannot be met. Also, a buyer will be allowed to moving into the new property at an earlier date, if closing is allowed to occur before the buyer’s original property may close. The fee for bridge financing varies from lender to lender but usually consists of a one time fee of between $250 and $700 plus interest which is only charged for the duration of the loan, usually 30–60 days. Interest rates are usually prime plus 2% to 5%.

At First Foundation, we work closely with realtors, lenders and solicitors during the closing process. If you find yourself in a situation where a bridge loan may be necessary, we can provide assistance to obtain a bridge loan for your new purchase.

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Last updated Nov 19, 2014