Definition of Interim Financing
Interim Financing is the process of obtaining temporary, short term financing to close a real estate transaction.
Interim financing, also called bridge financing or a bridge loan, is often used by a buyer who is selling a home to buy another, but the sale of the first home cannot be completed before the purchase of the second home must be completed.
Interim financing is used to cover the remaining purchase price of the second home until the proceeds of the first sale are received.
Mr. McGillicuddy is selling his first home for $200,000 and purchasing a new home for $300,000. He is obtaining a mortgage for $250,000 to finance the purchase of the second home, and is using $50,000 of the proceeds of the first sale as a down payment on the second home.
Because repairs must be made to Mr. McGillicuddy's first home prior to sale, it cannot be closed before his purchase of the second home is required. Mr. McGillicuddy’s mortgage lender agrees to loan him $50,000 until the first sale is completed. The $50,000 is used to close the purchase of the second home, and will be repaid when the first home closes. The $50,000 loan is called interim financing, or a bridge loan.
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Advantages of Interim Financing
Interim financing may be necessary to prevent losing a sale or purchase of property. Rather than canceling a transaction due to a temporary delay in closing a transaction, a mortgage lender may find it advantageous to loan short term funds to a buyer. The lender benefits because it obtains interest on the loan during the interim period, usually 30–60 days. The buyer benefits because the new property can be closed earlier and the buyer does not risk losing the property.
Disadvantages of Interim Financing
Since the interim loan carries an interest charge on its own, the buyer will pay more in interest. Fortunately, this additional interest is only for a short time and is usually nominal. There will also be a loan fee which varies from lender to lender from around $250 to $700.
At First Foundation, we understand that real estate transactions cannot always be closed in sync with each other. In the event interim financing becomes a necessity, we can often work with a lender to obtain interim financing for you.
If you are interested in learning more about Interim Financing, please feel free to contact us today!