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Glossary of Notary Public, Mortgage, Signing Agent, and Loan Signing Terms.

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Bridge Loan

Phonetics: bridge loan

Function: noun

A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan." A bridge loan typically has a duration of anywhere from two weeks to three years. A bridge loan is considered intirim financing and is used until a more permanent method of financing can be employed. Bridge loans are generally more expensive than conventional financing to compensate for the additional risk of the loan. Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, as well as various fees and other perks such as equity participation by the lender in some cases. The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.

Bridge loans are commonly used for commercial real estate purchases. The purpose of the bridge loan is to be able to quickly close on a property, retrieve property from foreclosure, or take advantage of a short-term opportunity in order to secure long term financing. Bridge loans on a property are typically paid back when the property is sold or refinanced with a traditional lender. In such a case, the borrower's creditworthiness improves and the property would have been improved upon or completed. There could be timing issues that could arise from project phases with different cash needs and risk profiles as much as ability to secure funding.

Many banks will not issue bridge loans because they are very speculative and don't necessarily meet a bank's criteria for lending. Some of the uncertainty of a bridge loan lies in the fact that it can sometimes be unpredictable when a particular project will end, in addition to the fact that obtaining certain permits might become an obstacle.