What Are Bridge Loans? Not the Same as Gap Loans

Many people ask the question, ‘what are bridge loans?’ A bridge loan is essentially a commercial hard money loan. A bridge loan can also be a short-term loan on an investment property. This is not to be confused with “gap financing.” Bridge financing and gap financing are often used interchangeably but this is a mistake. These are two different types of financing.

Gap financing is essentially the gap between what a lender is willing to lend and the acquisition price of a property. This is the amount that the borrower on the loan is expected to bring in as a down payment to close on the property. However, some borrowers don’t have any cash for a down payment so they seek out another lender that will provide gap financing.

In an example, a borrower is buying an investment property and is able to get a bridge lender to provide a hard money loan on the purchase. The bridge lender provides a loan for 75% of the purchase price and expects the borrower to bring in 25% as a down payment. If the borrower doesn’t have the 25%, they must find a gap lender that will bring in the 25%, to close on the property.

Hopefully this discussion will clear up any confusion between bridge financing and gap financing. I hear people using these terms interchangeably to mean the same thing and these are 2 different types of financing. Any comments or anything you would add to this discussion?