Bridge loans are short-term loans commonly used in the world of real estate. It is typically used until a more permanent loan, such as a mortgage is obtained or until the requirements are complete. A bridge loan’s term tends to be very short in comparison to others, and usually is around 12 months. Fees associated with this type of loan tend to be higher than average.
Bridge loans are commonly used when a homeowner is interested in purchasing a new property before the sale of their property is complete. The homeowner would use the bridge loan to cover the closing costs associated with buying a property. Later the homeowner would apply for a home loan or mortgage which would also cover the bridge loan.
They can also be used to avoid foreclosure, to close a deal quickly, and to take advantage of a short term opportunity.
Lenders that provide bridge loans may have some different requirements than a standard mortgage or home loan. Usually they require less paperwork from the lender but have standards to approve a loan. This can include cross-collatarization and a lower loan-to-value ratio on the property.
Besides the world of real estate, bridge loans are also occasionally used in the world of venture capital funding and corporate finance. For example, it may be used to inject capital into a company between funding rounds. It also is used sometimes by companies for capital before they launch a public IPO, or are acquired by a different company.