In its simplest terms, a bridge loan is a short term note used to get you from one position to another. As it relates to real estate, a bridge loan can be used to renovate an existing property and bring the property back to a condition where a buyer can obtain a traditional loan.

A bridge loan can also be ahow do bridge loans work short term loan to someone who needs additional funds for a down payment on another property. Let’s look at two examples how these loans can work for real estate investors.

An investor finds an abandoned property but the property is in very poor shape. It’s not habitable and a bank won’t finance the purchase. But a bridge loan can be issued by a private lender for the amount needed to acquire and renovate the property. Once completed, the home is worth much more than the original purchase price along with the renovation costs and is now available for anyone to buy and finance. The bridge loan is secured by the subject property but can be collateralized on multiple properties if needed to boost the loan amount. Once the property sells, the bridge loan lien is released.

Another bridge loan advantage occurs when buyers want to buy another property but their existing home has yet to be sold. A bank can place a short term bridge loan on the existing property and provide the owners with enough funds needed for a down payment and closing costs for the next property. The lien will be placed on the existing home and will be paid off once the existing home is sold. In such an instance, the buyers must be able to afford both the existing mortgage and the new one.