Bridging loans are a type of loan commonly used in real estate transactions involving commercial real estate. According to the “Principles of Real Estate Finance”, the bridge loan is a temporary form of financing that buyers use for a period of time ranging between two weeks and a maximum of three years. The term bridge refers to the temporary nature of funding and the need to ensure long-term financing to replace short-term loan. When they used
Buyers often use bridge loans when they have to close a transaction quickly. The bridge loan allows the buyer to ensure ownership and work on the details of the long-term financing at a later date. Another common situation where you may decide to get a bridge loan is in case of foreclosure. Commercial property owners often use bridge loans to secure a loan to prevent foreclosure.
Bridge loans generally have higher interest rates and other types of loans. The higher interest rate risk derives from the bridge loan for the lender. With reduced loan, the lender does not know for sure that the buyer is another long-term source of funding. Therefore, the bridge loans have a higher default rate. In addition, lenders offer both fixed-term and open bridging loans. Open bridge loans have no specific date set at the time of origination of the loan settlement.
Commercial vs. Residential
Short term bridging loans are typically associated with commercial properties. Investors often buy commercial real estate for the purpose of business and making money. Therefore, as buyers of commercial real estate shop as investments, lenders have less risk of making bridge loans to buyers of real estate buyers of commercial and residential real estate. In addition, lenders can review the history of the company, as part of the credit assessment when you make a commercial bridge loan. Lenders have not been able to make such an assessment by residential real estate.
Find An Exit Strategy
Lenders also study the exit strategy of the bridge loan applicant in assessing applicants commercial bridge loans. In other words, the lender wants to know how and when the owner of commercial property to pay or refinance the bridge loan. Given the exit strategy, bridging loans lenders are able to estimate the risk of default. The terms and conditions surrounding bridging loans vary from loan to loan and lender to lender. Therefore, you should always fully understand the terms and conditions associated with a specific bridge loan before signing the loan contract specifications.