An interim form of financing used in a
variety of residential and commercial
transactions.
In residential sales, bridging may occur
when a buyer is committed to completing the
purchase of a property on a specific date,
but will not have sufficient funds until a
later time. This frequently arises when the
buyer’s property has sold with a late
closing date, or the property remains
unsold. Lending institutions may be prepared
to advance funds under a bridge loan based
on the borrower’s personal covenant,
verification of relevant documentation, and
a direction for the payment of funds on
completion of a sale, or when a mortgage is
placed on the unsold property.
The bridge loan is also found in new
construction. Bridge loans can assist a
developer between scheduled advances
(normally received through either an interim
or permanent lender). The bridge loan is
intended to provide cash to pay immediate
expenses while awaiting the next formal
advance and is said to bridge the distance
between advances.
Example of Bridge Loan
Seller Smith’s current home has a
scheduled closing date of May 31, 20xx.
Smith will net approximately $90,000 from
the sale. However, his new home purchase
with a negotiated selling price of $250,000
closes on April 30th. Smith requires a
$100,000 downpayment in addition to the new
first mortgage of $150,000. The downpayment
will come from savings and equity in his
current property. He has $20,000 and
requires $80,000 to complete the sale. The
bank arranging the first mortgage agrees to
advance the additional $80,000 by way of a
bridge loan until the prior property closes.
Smith retains $10,000 of the $90,000 from
the sale of his current home for moving and
miscellaneous costs, with the balance being
applied to the bridge loan.
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