What is a bridge loan? A bridge loan is a short term loan used by borrowers to meet their short-term financial requirements. Also known as gap financing or swing loan, it serves as a viable option to meet immediate cash requirements. It is usually extended for a short period of time, going up to twelve months. However, it is offered at a high rate of interest and is usually backed with a property as security.
In the real estate sector, bridge loans allow the buyer to get more finances for a new property while keeping the existing property as security. For example, if a homebuyer wishes to buy a new home and there is a time difference between buying a new home and disposing of the old one, a home bridge loan can be used to facilitate the purchase. The original home will act as security for the loan. Since a bridge loan is a short-term arrangement, it is repaid when a long-term financing option is available.
A bridge loan agreement is also known as bridge financing agreement, is a document that governs the conditions of the loan between the borrower and the lender. It lists down the terms which both parties have to abide by during the subsistence of the loan. In case of a dispute, the loan document acts as a guide to interpret the terms and resolve the issue.
Key Terms of a Bridge Loan Agreement
The following are some important terms that should be incorporated in a bridge loan agreement-
- Names and identification of the parties
- Definitions of the terms used in the agreement
- Description of the loan- amount, rate of interest, collateral
- Provisions regarding payment
- Representation and warranties by the parties
- Events of default
- Notice requirements
- Law governing the agreement
- Signature of the parties
Drafting a Bridge Loan Agreement
There are a few key points to be kept in mind while drafting a bridge financing agreement.
- Clearly define the terms used in the agreement. There should be no ambiguity as it may lead to disputes.
- Describe the loan in clear terms. State the duration, amount, rate of interest for the loan, and the property that will act as the collateral. Describe the property for clear identification.
- Enumerate the manner of payment- the amount to be paid, when, and how it should be paid.
- Ensure that the terms are not in violation of any provision of federal or state law.
- Include standard representations and warranties of general loan agreements, such as the lender’s obligation to take care of the collateral. Include any specific provisions if necessary.
- State the events of default that will lead to the annulment of the agreement.
- In order to avoid jurisdictional and procedural disputes, mention the law that will govern the loan agreement.
- Ensure that both parties sign the agreement.
Pros and Cons of a Bridge Loan
Some of the advantages of a bridge loan are:
- Since it is only for the short term, it can be repaid once long-time financing is arranged. This reduces the financial burden on the borrower placed by traditional long-term loans.
- In the case of a residential bridging loan, the homebuyer can freely buy a new house without being bound by the old house’s resale. He can offer the seller a competitive price for the new house even if his old house has not been sold by that time.
- The borrower can choose the repayment options- either before he secures permanent financing or afterward. In the former case, he can pay the entire amount over a limited period of time. If he pays the installments in a time-bound manner, his credit score will improve, making it easier to secure long-term financing.
There are also a few disadvantages of a bridge loan-
- While the duration of a bridge loan acts as an advantage, it is also a disadvantage. Since the time to repay the loan is shorter, the payments will be larger. This can be burdensome for borrowers who do not have enough finances.
- It relies on the availability of long-term financing. If that is not available, the borrower would have to pay out of his own pocket.
- It is lent out at a higher rate of interest than other loans. There are also various fees involved, such as origination fees and closing fees.
- A major risk in bridge loans is the possibility that a homebuyer may not be able to sell his old home after buying a new one. This may lead to him having to repay multiple loans, thereby significantly increasing his financial burden.
Types of Bridge Loan Agreement
There are two main types of bridge loan agreements-
- Open bridge loan agreement: Under this agreement, there is no definite date to repay the loan. For example, if a homebuyer is not able to sell his old house, it cannot be said with certainty when the loan will be repaid.
- Closed bridge loan agreement: Such an agreement mentions the date on which the loan will be repaid and the manner of such repayment. These offer relatively more certainty to the lender than open bridge loans and are thus offered at comparatively lower interest rates.
Sample Bridge Loan Agreement
A sample of the bridge loan agreement template can be downloaded from below.
Download this USA Attorney made Original Agreement for only $9.99
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This agreement is made between the Lender and the Borrower on the effective date of 12th November 2011.
Lender represented by
Mr. Josh Kovacs
Address: 428 N Simpson Street, Philadelphia PA 19151
Contact number: (215) 622-9827
Borrower represented by:
Mr. Arthur Shaw
Address: 417 South Carlisle Street, Philadelphia PA 19146
Contact number: (215) 271-8656
Terms and Conditions:
- The Lender agrees to provide to the said borrower a loan that is subject to the terms and conditions of this Bridge Loan Agreement, and the aggregate amount of loan is $500,000 and will be known as the “Principal Amount” and has to be provided through several installments as described in this Agreement.
- The Company or Borrower will use the Principal Amount mentioned in this Bridge Loan Agreement in accordance with a pre-approved budget henceforth known as the “Budget,” and a copy of the same should be provided to the Lender prior to the sanction of the loan, and this is to be included in the Schedule of Exceptions and Disclosures section in this Agreement.
- The Lender will transfer the first installment of the loan to the Borrower aggregating to the amount of $200,000 on Sunday, November 13, 2011, and will henceforth be known as the “First Installment.”
This Bridge Loan Agreement shall be in force when the parties “Lender” and “Borrower” set their seals as on the date 11/12/2011 (MM/DD/YY).
SIGNED FOR AND ON BEHALF OF LENDER BY:
SIGNED FOR AND ON BEHALF OF BORROWER BY: