A Bridge Loan is a type of short-term loan that uses the equity in your home or business to capitalize on purchasing opportunities or meet current obligations. This gives you access to immediate cash flow, which can give you the power to put a down payment on a property or home in which you are interested. As you know the housing and property market is very hot, if you are selling your current home and you feel the house or property you are interested in buying will get purchased by another party if you don’t act quickly, then a bridge loan can give you access to the funds you need for the down payment. Most people will not live in the original home they buy forever, at some point they may want to buy a new home to move locations, upgrade or downsize. When this is the case homeowners will want to use the equity in their current home to put towards the purchase of their new home. However there are times when people find them selves in a situation where there closing date for buying there home falls before the closing date of selling there home. In other words there house has not sold in time to give them the funds to put a down payment on the new home they wish to purchase. This is where a bridge loan is utilized; using the equity in your current home as collateral for the loan to put towards the purchase of your new home. This type of loan is usually short term, up to one year and generally has higher interest rates. This loan is secured through some form of collateral, like inventory or real estate.
Using a Bridge Loan how Much money can You Loan And for How Long?
As Lenders we will need to evaluate a borrower’s specific situation in order to give a borrower a maximum amount they can loan, and for what amount of time they have to [ay it back. In most case’s Lenders are comfortable lending up to $200,000 for as long as 4 months, if more time and more money is needed the lender will need to evaluate your specific situation in order to see if you qualify. Keep in mind for Larger and longer loans a lien may need to be registered on your property, if this is the case it will be more expensive due to the legal fee’s involved.
How Is a Bridge Loan Calculated?
If you are Look to purchase a new home, and you discover the closing date is in 25 days, meanwhile the closing date for the house you are selling is in 75 days. In this example a bridge loan would cover the required amount of equity during that 50-day period (75days – 25 days = 50 days). To better understand the process lets use an example, you are purchasing a new home for $500,000 and you have put down a 5% deposit (in this case that would be $25,000), but you wish to use the remaining $240,000 of equity in your current home to put towards your new home. The problem is there is a 50-day gap between the sale of your home and the closing date for the purchase of your new home creating a desire to get the money fast. In this example a bridge loan would be and ideal choice to help “bridge” together the gap between the selling of your current home and the purchase of your new home by giving you the funds to pay the difference between your deposit and your total amount due.
Are there Any Additional Fees?
As with any kind of loan, A bridge loan has interest, generally similar to a rate you would expect from a personal line of credit. You can expect a bridge loan to be higher than your first mortgage rate – generally it is the prime rate + 2% and in some case it can be up to 3%. This type of loan is issued over a short period of time, and will be repaid when the equity of your previous home sells.
Typically in conjunction with the small interest applied to you loan, there is a flat administration fee – generally between $200-$500. If you are expecting to loan more than $200,000 as previously stated there is a possibility the lender will register a lien on your property; in that case you will need a real estate lawyer if you want to remove the lien.
How to Qualify for a bridge loan?
The most important piece of criteria when applying for a bridge loan is a copy of the purchase agreement for your new home, and a copy of the sale agreement from your current residence. However if your selling date is not firm, then a private lender will be needed as most banks and traditional lenders will require a firm selling date.
How Do Businesses Use Bridge Loans?
If you are a business and find that you are waiting for long-term financing and need cash to manage expenses in the time being than a bridge loan is a great way to gain access to that money. In this case a company could be stuck waiting for their financing, and can be burdened by not having access to the capital to cover utilities, rent, payroll and inventory costs. This would be an ideal time to look towards a bridge loan to help cover these expenses until the round of financing processes.
How Do Bridge Loans Work in Real Estate?
A bridge loan can be an ideal tool to gain access to some funds using the equity of your current home to act as collateral for the loan to go towards the purchase of your new home. This is particularly effective when there is a delay between the sale of a property and the purchase of another, as the bridge loan can give them the funds they need immediately to help close the deal on their new home purchase. This type of loan is provided to a borrower whom has an excellent credit score and a low debt to income ratio. In essence a bridge loan bridges together 2 mortgages of your two homes, which gives you flexibility when waiting for your home to sell. Bridge loans due have some risk coincided, so for that reason lenders generally offer bridge loans for real estate at 80% of the combined value of the two homes, which can leave the borrower needing to have a substantial amount of home equity, or a large amount of savings.
What Are the Differences Between Bridge Loans and Traditional Loans?
The process of qualifying and receiving a bridge loan moves much more quickly than traditional loans. This is because people that need to use bridge loans need the money fast. Of course this level of service comes at a price, the loans experience higher interest rates, larger origination fees, and are usually short term. People that need bridge loans do not mind paying a premium for this service, because they need the money fast and understand that the loan is short term and will be repaid when their property sells or their financing is received.