What is Bridge Financing?
Bridge financing, sometimes called a bridge loan, is temporary financing to assist a company until they have secured long-term financial assistance. It can also be used in real estate, helping you to purchase property while trying to sell your home. It essentially bridges the gap between the two events.
Read the rest of this article to learn more about bridge financing: its process, how it varies from traditional mortgages, its pros and cons, and how a lawyer can help you to secure temporary financing.
How Does Bridge Financing Work?
A bridge loan helps homeowners to use equity in their property when buying a new property, before the sale closes. It helps them to cover any gaps in financing.
But, there are different ways in which you can make use of bridge loans. For example, you could apply for a bridge loan to use as a down payment on a new property you wish to buy, or to cover your closing costs on your current property sale.
Steps Involved in Getting a Bridge Loan
General steps involved with getting a bridge loan include the following:
- You’ll consult with a lender for a bridge loan.
- You’ll wait for the loan to get approved and get your funding. This can take approximately two weeks.
- You’ll use the funds and pay off your loan when you finalize the sale of your home.
How Does a Bridge Loan Vary From Mortgages?
One of the most appealing things about a bridge loan is that it has a faster payout rate than a traditional mortgage. There are other ways in which it varies from traditional mortgages.
- Higher additional costs. A bridge loan tends to contain higher fees and rates than conventional home loans.
- Short term duration. Since bridge loans are temporary, they don’t lock you in for several years or decades in the same way that conventional loans do. They typically last for six to 12 months, but can be longer if required.
- Smaller monthly payments. While regular mortgages involve monthly payments and interest, bridge financing usually includes interest-only payments and a balloon payment at the end of the term.
- Fast approval. A bridge loan can be approved in three days, while it can take weeks for a mortgage to be approved.
What are the Pros and Cons of Bridge Financing?
There are important advantages and disadvantages of pursuing bridge financing.
Pros
- It’s fast. If you need money quickly, a bridge loan will enable you to cover your costs.
- It’s flexible. You can use a bridge loan for various reasons and its terms and conditions can vary to suit your requirements.
- It can involve deferred payments. You might be able to make use of deferred payments until your house sells.
Cons
- It can be costly. There are upfront costs involved with bridge loans.
- It requires payment even if your house isn’t sold. You’ll have to pay off the loan even if your property doesn’t sell.
- It involves a short repayment period. You’ll need to repay your bridge loan within a few months or a year.
How Do You Qualify for a Bridge Loan?
When you want to apply for a bridge loan, you’ll have to ensure you qualify for it. A lender will scrutinize your information, such as your debt-to-income (DBTI) ratio, your credit score, your home equity, and your income.
You’ll need to provide some important legal documents when applying for a bridge loan, such as proof of income, bank statements, tax returns, and property appraisals. These will help you support your bridge loan application.
That said, if you don’t qualify for a bridge loan, there are other options available to you. These include:
- Home Equity Line of Credit (HELOC). This credit enables you to borrow money against the equity in your home, which could be limited to borrowing around 80 percent of the property’s appraised value. It tends to have lower interest rates than a bridge loan.
- Cash-out Refinance. This also lets you borrow money against your home’s equity but you’ll take out a new mortgage. Regular monthly payments will be required to pay it back.
What are Other Uses for Bridge Financing?
Besides using bridge loans for property sales, they do have other uses. These include:
- Covering business-related costs, such as inventory expenses. Companies can use bridge financing when they’re waiting for permanent financing to occur.
- Covering cash flow gaps. This also helps retail business owners who might need financing if they are waiting for payments from customers.
- Funding costs when waiting for insurance claims. If you’re waiting for your insurance company to pay out a claim, you can get bridge financing to help you cover expenses in the meantime.
Do You Need a Lawyer for Bridge Financing?
You don’t always need to hire a lawyer to help you with your bridge loan, such as if you’re working with a lender you’ve dealt with before and your loan is for a small amount.
However, working with a lawyer can help you in various ways. These include the following:
- They’ll advise you on the best financing method depending on your situation and requirements.
- They’ll help you to navigate complex terms involved in the loan.
- They’ll assist you with collecting important documents you need for a successful loan application.
- They’ll review your bridge financing documents to ensure they’re fair, legal, and transparent.
- They’ll review your bridge financing agreement terms if you’re securing financing for your company. This serves to protect your interests and minimize your risks.
Where should you hire a lawyer for bridge financing?
If you want to hire a lawyer for bridge financing, you should consult with a lawyer on ContractsCounsel, an online legal marketplace that connects clients with vetted lawyers on the platform. They have years of experience and the skills to help you navigate bridge financing, ensuring you understand all your options and achieve short-term funding.
