3.1.16 Bridge or Gap Financing

A. Bridge financing is a short-term loan that is secured by the property or by a pledge of an interest in the borrowing entity, pending the start of a long-term permanent loan. Bridge loans that are secured by the property (as distinguished from a bridge loan used to fund equity during construction and which is secured by ownership interests), are acceptable only in instances of Insurance upon Completion and before the start of the FHA-insured permanent financing. Bridge financing is permitted as long as the bridge loan is repaid no later than the time of permanent loan closing or converted in whole or in part to Secondary Financing within the allowed limits for the FHA program. Bridge loan or other debt intended to increase the FHA-insured mortgage or circumvent outstanding program requirements will not be recognized as existing indebtedness in the cost basis. Gap financing is a loan that may be secured by a subordinate lien behind the permanent first mortgage to provide additional capital funds for the project; it must meet the Guide’s requirements for secondary financing. See Chapter 14 for a detailed discussion of the use of bridge financing in relation to the LIHTC program.