A bridge loan, that is.
A bridge loan is also known as an interim loan or gap financing. It is used mostly in real estate but can also be used for other purposes. Bridge loans help those who are selling one home and buying another to borrow against the current equity to finance the down payment of the future home. The time frame to pay back these types of loans is typically 6-12 months. Interest rates for these loans are usually 1-2% higher than fixed interest rates.
For a business, a bridge loan is helpful when an owner is waiting for a round of equity to close but needs cash now in order to keep things running smoothly. A bridge loan for a business can only be 60 days sometimes. He could ask an investor to loan him with how much he needs to manage the business efficiently and pay back the money when the equity closes.
However, if you are asking a bank for a bridge loan, as a business or home owner, you will need to have sufficient cash flow or the loan application is likely to be denied. As a homeowner, the bank will look closely at your debt-to-income ratio which has a general guideline not to be above 36%. The bank will also have your current home appraised and check for any existing loans of the house. All of these will help determine if the loan is approved, and if it is, what amount the bank is comfortable lending you and what your payments will be. Most homeowners end up with two house payments for a short time.
As a homeowner or a business owner, you’ll want to be sure that your loan is structured to your unique needs. Some options include no payments until the end of the loan and others allow paying only on the interest of the loan until the loan is due in full. Be sure to do your research and ask your lender what options are available to you.