The Secret Loan That Buys You Time

The old joke is banks will only lend money to those who can prove they do not need it. Alas, there is more than a grain of truth in that statement. Ah, but what if you need money now and in dire circumstances? A bridge loan may be the answer.

To make things as complicated as possible, the financial industry uses terms no person in their right mind would. Bridge loans are one area where this is not the case. The bridge loan does just that. It bridges a period of time with financing.

It always helps with financing to look for the simplest examples, so here we go. I buy a home and escrow is set to close on September 15th. I sell my home to fund my new purchase, but escrow will not occur till September 22nd.

I am in it deep. I am going to come up a week short on money. How do I fill this 7 day gap in my financing? The bridge loan is the answer. The loan will allow me to buy the new home with the money I get from my sale being used to pay it off.

Bridge loans are used more often in commercial real estate. They are often called opportunity loans. A business may see a unique opportunity to buy a property, but cannot wait for traditional financing.

Traditional mortgages are cash machines because people will pay interest for 30 years without batting an eye. Bridge loans are profitable, but not in this way since there simply is not enough time to pull in enough on interest to justify the risk.

To make a profit, lenders take a two pronged approach. First and foremost, they are going to charge big points on the loan. You can expect 3 to 5 points at a minimum. The lender will also crank the interest rate up to double the going rate.

The costs associated with a bridge loan are the obvious disadvantage, but they have their purpose. Processing is done very quickly and with little documentation. When you need immediate financing, these loans are just about your only option.

There is one catch with bridge loans you need to be aware of. The LTV on these loans is rarely above the sixty percent range. LTV refers to the loan size compared to the value of the asset you are borrowing against.

While bridge loans are not all that common in the personal finance world, they can make all the difference in the world of commercial finance. If your business runs into a time problem, make sure to take a look at them.