A type of loan called a bridging loan is a short-term loan that is issued to a borrower for a period of 2 weeks to three years or so, while arrangements for a more permanent type of financing is negotiated.
In the United Kingdom it is known as a bridging loan, or also as a “caveat loan.” Another term that is used for this sort of loan is a “swing loan.”
Lenders will use this means for borrowers of good credit who they do not want to lose to competition, in that there may be some time needed to get all of the information together in order to secure the more permanent type of financing. In this way they can tie the borrower to their camp while all of the extra details are ironed out.
These bridging loans simply allow the borrower to make use of the property or not make use of it depending upon the terms of the contract, but once the permanent financing is in place, it will be used to pay off the amount of money lent for the bridging loan as well as any other needs for capitalization.
The cost for a bridging loan is going to be more expensive than financing on a conventional basis due to the nature of the risk, and the duration of the loan. There may be extra points assigned to the loan (1 point equals 1%, and points are basically fees.)
For the most part, bridging loans are often arranged with very little need for documentation, but may require more collateral as well as a lower ratio for loan-to-value. Costs for the loan are also amortized for a shorter period of time, which can give the illusion of a higher cost.
Bridging loans are very often used in the commercial real estate venue in order to close on a property very quickly, rescue property from having to go into foreclosure and to take advantage of a competitive or a short-term good opportunity so the property can be secured while longer-term financing is arranged.
Bridge loans often have a lot to do with timing where the property needs to be secured while the documentation of longer term financing is arranged when improvements are being made, more complex long-range financing is being conducted, or more phases of financing are being arranged.
Hard money loans are similar to bridge loans in that they are both of short duration compared to a multiple year mortgage loan arrangement. Hard money loans pertain to the source of the lender, such as individuals, a private company or a pool of investors as opposed to a bank or mortgage company.
These types of loans are usually higher interest loans in order to attract the money, but bridge loan is from a bank or mortgage company, and will fill in a gap until permanent loans are set up.
Bridging loans can be closed loans, meaning that there is a time frame as to how long it is available. Or the bridge loan can be open where there is no payoff date that is fixed, but a payoff date may be determined at a later time.
Bridging loans are often used by property developers enabling them to begin and to carry a project while approval is in the works for permits and other legal tasks. The loan may be of a higher rate of interest due to the speculative nature of a project. When the project becomes more solid, such as in the case of permits being issued, then more permanent financing will be made available.
Bridging loans are very common in the course of events in the financial world as a method of solidifying the future of permanent financing in projects that have different stages of development.