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What is a Bridge Loan?

Jesse Abrams - April 30, 2018, 5:47 pm

What is a Bridge Loan

Bridge loans are short term loans, usually a couple of weeks at the most, meant to “bridge” the purchase of your new home with the sale of your existing residence.

    

Example of a bridge loan

For instance, your new home purchase closes on June 20th, but the sale of your existing home does not close until June 25th. You need the proceeds from the sale of your existing home to pay for the purchase but you do not get the proceeds until the 25th. A bridge loan will shore up the difference-making it possible to purchase the home with the future proceeds of the new home.

      

How does a bridge loan work?

The bridge loan will be registered against the existing property and paid back when the sale goes through.

      

Why would you put yourself in a situation where a bridge loan is necessary

Well imagine yourself moving homes and you- of course- will need time to pack up your old home and move everything into your new home. Instead of putting everything in storage for the time in between the sale and purchase (the cost of storage facilities can be extremely costly), not to mention arranging two moves (also very costly), you might find arranging a bridge loan for a few weeks to be much more convenient and cost-effective. You might ask, “why don’t I just make the sale and purchase close on the same day, therefore negating the need for a bridge loan or storage needs and two moves?” Well, you could do that, but it is a risk some people do not like to take, because if something goes wrong with either transaction, you will be in a very untenable position not being able to close on one or the other. Not to mention, lenders and lawyers who have to take care of all the paperwork will charge you more for all the extra work and stress of closing two transactions at the same time.

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