How to Use a Bridging Loan

A bridge loan is much like the name implies; it's a loan that forms a "bridge" between two transactions. Some call this a "swing loan" such as helping you "swing the deal." Having to use a bridge loan isn't always best move financially. However, if your real estate or investment scenario isn't going exactly as planned, using a bridge loan can really help you out.

Difficulty: Moderately Challenging

Instructions

1. What happens when you find the house of your dreams before you have sold your current home? This is when most bridge loans are used. Working with your real estate professional and your mortgage broker, you can go ahead and sign the contract on that house that you really want, even though you haven't sold your current home. The contract will be written as being "contingent" upon you being approved for a bridge loan. This will mean that you obtain financing to purchase the new home by borrowing against the equity in the home you own and that is currently for sale. Depending on the bridge loan lender, you are normally only allowed to borrow up to ninety percent of the equity in your current home. Bridge loans have terms anywhere from two months to two or three years. Note that you will be making payments on the bridge loan along with your current mortgage payment if you have a mortgage on that home.

2. Retrieve a property or piece of real estate before it goes to foreclosure. This is another use for a bridge loan. Real estate investors do this quite often. They watch for homes that are about to be foreclosed, obtain their financing through a bridge loan and purchase the property before it is foreclosed. The bridge loan is paid off as soon as this property is sold. In this case, the bridge loan is granted to the investor based on other property or assets they own.

3. Develop a new real estate subdivision or business complex. This can be yet another use for a bridge loan. The developer or investment group may purchase some acreage with plans for building development. A bridge loan will come into use to purchase the acreage while the interim financing is still being worked out for the entire project.

Tips & Warnings

• Short terms and being able to obtain the loan quickly are the best assets of a bridge loan.
• Bridge loans come with higher interest rates than more traditional financing and usually have more fees associates with these loans. Be sure to ask what fees and at what cost they will be prior the finalizing a bridge loan.