Characteristics of a bridge loan

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A bridge loan is a special type of credit that is used when there is an immediate need for financing. Its main singularity is its temporary nature since it is granted only until the final loan is formalized, as long as the debtor ensures future income. That is, the borrower must offer a guarantee of future income that ensures the repayment of the credit. Without this support, the financial institution will not grant the credit.

Just as a bridge is a construction that allows us to save a geographical accident and reach the other side, the bridge loan allows the applicant to move from one economic situation (need for immediate financing) to another (to obtain a larger financing in the future nearby) to achieve your goal (buying a home, for example). This is short-term financing that occurs between the processing of two long-term loans.

Characteristics of a bridge loan

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Although a bridge loan can be requested for business projects, its most frequent purpose is to be able to acquire a new home without the need to sell the current property quickly and under unfavorable conditions. Among its main features are the following:

  • Its main purpose is the acquisition of a new home for which some type of advance payment is required. That is, that an immediate need for financing arises and we want to have a reasonable time to sell the current house, without the need to sell it quickly.
  • It is a temporary loan, as it is temporary financing until the final credit is formalized. In fact, most of the entities grant a term of between two and five years, which they consider a sufficient margin not to “sell” the main house at a lower price than the market.
  • They usually demand more stringent requirements for their concession, given that it is a financial product that entails greater risk for the borrowing entity (if the debtor is not able to sell the home and does not have the financial capacity to repay the loan). Thus, the applicant must provide a guarantee of solvency or future income that ensures the return of the credit. Without this guarantee, the financial institution will not grant the credit.

Advantages of applying for a bridge loan

Advantages of applying for a bridge loan

As we saw in previous lines, this type of financing is usually allocated to the purchase of a home while the current one is in the process of being sold, so in the financial environment, it is also known as bridge mortgage.

The advantage of requesting a bridge loan is that the fee can be negotiated so that it is paid with a lack of capital, that is, that capital is not amortized and only interest is paid. A reduced special fee can also be negotiated lower than the one to be paid once the mortgage is subscribed so that it is comfortable for the client during the time in which the initial house has not been sold.

However, once the term for the sale of the property has elapsed, if the same has not occurred, the lack (or, where appropriate, the special fee) will end, passing the credit to be a conventional mortgage loan, with a system of usual amortization. If on the contrary the sale has been made effective, the money obtained may be used to amortize the outstanding amount of the first mortgage loan, as well as that of the bridge loan.

Ways to pay a bridge loan

While capital (or principal) plus interest is paid on personal loans or mortgages, during the two or five years of the bridge loan, your fees can be paid in three different ways:

  • Share with lack of capital: only the interest on the loan is paid, without amortizing capital pending repayment.
  • Special reduced fee: a lower fee is paid than will be applicable when the current home is sold. Thus, the quota contributed each month is mainly used to pay interest.
  • Normal quota: as usual in this type of financial product, capital is amortized plus interest.

Drawbacks of the bridge loan

Drawbacks of the bridge loan

Following the crisis caused by the housing bubble in our country, uncertainty is the order of the day in the home buying and selling market. Thus, although at first glance five years seems a more than enough period to sell our house, we may not be able to formalize the transaction in the agreed time.

Here the problems begin. Precisely, the main disadvantage of this financial product appears when once the period of lack is over. Thus, if we have not been able to sell our home, we will have to repay the total loan, that is, the principal plus interest.

In addition, due to the double risk they assume, traditional financial institutions require collateral and guarantees to ensure the operation. Thus, the study of each case is usually slow and cumbersome and is only intended for very specific clients of the bank.

So, we only recommend this type of financing when you do not have another alternative and have verified that we are in a moment of economic growth or stability of the real estate market.

Another option is to go to personal loans or fast loans. In Good Credit, we have designed the first line of credit for individuals that puts at your disposal up to 5000 dollars that you can return in comfortable monthly installments for up to three years, without management fees, opening or cancellation.

Thus, if what you need is a small injection of liquidity to provide a signal in the purchase of an apartment, car or to start up your SME, this is the fastest and most flexible way to get the money.

Finally, our advice is that whatever financing method you choose, always ensure that you have a healthy economy to pay the fees or any other eventuality that may arise during the term of the loan. In no case is it advisable to acquire a financial product that does not fit our current or future situation.


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