Bridge loan is one of those financial terms that many probably don’t understand. This may be what keeps lots of people from getting a bridge loan, which is unfortunate. Bridge loans can be extremely useful for a lot of consumers and can make buying a home easier.
This article will cover what a bridge loan is, the fees associated with one, and the benefits and the disadvantages.
What are bridge loans?
First, bridge loans are temporary loans secured by some type of asset, usually a home. The name bridge loan describes them quite well. The bridge refers to the gap between one loan and the other when you don’t have any capital.
For instance, you can place your home on the market, take out a bridge loan against the home, and use that bridge loan to pay the down payment on your new home.
Simply put, you don’t need to wait to sell your home to purchase a new home. The bridge loan allows you to purchase your new home while you wait to sell your old one.
Why do people use bridge loans?
Bridge loans have a lot of uses. We’ve already talked about how people use them for homes. They can also be used for businesses. They’re used by businesses waiting for a long-term loan to clear. If a business has a long-term loan that will pay out in six months, but they need money before then, then they can take out a bridge loan with the long-term loan as a form of collateral.
How to get a bridge loan
Getting a bridge loan isn’t always the same as getting another type of loan. Yes, some lenders do require a high credit score, tax returns, and an acceptable debt-to-income ratio. Not all lenders require that information in this situation. Some lenders will assume that if you already qualify for a home loan, then you qualify for a bridge loan.
The bridge loan lender will decide to offer you a loan on the basis of whether it makes financial sense for you to get a bridge loan.
Bridge loan lenders will also determine if you can qualify for a second mortgage. If they don’t believe you can pay a second mortgage and a bridge loan, then you probably won’t qualify.
What are the average fees attached to bridge loans?
Bridge loans have fees, but rates vary depending on the lender, location, and your risk. Generally, a bridge loan will have more fees than a standard loan.
For instance, you can expect to pay about $2,200 in fees with a $10,000 bridge loan. This includes a title fee, administration fee, and appraisal fee. Not to mention the interest that you have to pay on the loan if you can’t sell your home in a timely manner.
Benefits of a bridge loan
Buy a home without restrictions: Often a seller will require that a buyer sell their other home before any paperwork can be signed. This requirement exists because the seller doesn’t want to risk the borrower not having the money for a down payment and the deal falling through due to insufficient financing. A bridge loan solves this problem because it provides the money for a down payment.
No monthly payments: bridge loans don’t usually have monthly payments for the first few months. This makes the whole moving process much easier because the homeowner doesn’t have to worry about two monthly payments on top of moving expenses. More important, it also gives you time to sell your home and pay off the loan without having any monthly payments. Interest does accrue even when you don’t have any monthly payments.
Drawbacks of a bridge loan
Bridge loans sound great, but they do have some drawbacks. They’re not for everyone.
More expensive than other types of loans: the first major drawback with a bridge loan is that they are costly. Most of the expenses comes from the high amount of fees that they charge. Home-equity loans are generally much cheaper than a bridge loan.
Must qualify to own two homes: this requirement will disqualify most borrowers. The lending company will want you to have the ability to pay two mortgages at the same time before they offer a bridge loan. Unfortunately, this requirement makes most people ineligible to receive a bridge loan.
Two mortgages and interest payments on a bridge loan can get expensive: finally, if your home doesn’t sell as quickly as you anticipated, then you will have to pay two mortgages and the interest payments for your bridge loan. These expenses can add up quickly.
You should make sure that you can sell your home before taking out a bridge loan. You don’t want to be stuck with two mortgages and a bridge loan payment. That could force you to sell your home at a lower price than you want, which is something that nobody wants. Unfortunately, many homeowners get themselves into that situation.
Should you get one?
Bridge loans make an excellent choice for some people and a poor choice for other people. You simply have to evaluate the fees and how quickly you believe you can sell your home before taking out a bridge loan. You also want to look at your financial situation to determine what’s best for you.
If you’re unsure whether you qualify for one, you can always speak to a lender to help you determine whether you do or not.