A bridge loan is a short term loan (usually 6 months) that is used for a few different reasons, one of them being that they can help cover the cost of a home purchase in the event that the mortgage falls through at the last minute. They can also help to fill the gap between two closing dates.
If a homeowner does not close on the agreed date, there can be huge financial penalties. For example, if a homeowner puts 50,000 down on a home and the mortgage falls apart, they could lose that deposit. This is where a bridge loan can save money and be very helpful.
Bridge loans are temporary loans which are secured by a homeowner’s existing equity. They are a type of short-term loan which can give borrowers access to cash needed to purchase and close a new home before the closing date of their current home.
How Does Bridge Financing Work?
Money borrowed from a bridge loan can be used to put a down payment on a new home or property, bridging the gap in the event that a homeowner’s existing home is not sold before the closing of a new home. Homeowners who take out bridge loans are essentially borrowing the down payment for their new home while waiting to get a mortgage from their bank or for their current home to close.
When buying a new home, the purchaser may use the equity which has built up in a home towards the purchase of their new home. The equity of the home can be used as collateral for the down payment of the new home. In this case, the loan is repaid when the sale closes.
What are the Benefits of a Bridge Loan?
A bridge loan can benefit a person who is in the process of buying a new home, rental property, vacation home, and more.
Because of all the pressure there is on a buyer to close, bridge loans must be arranged very quickly. Often they are not accepted by banks or cannot be done in time. As a result bridge loans can be more costly, however since they are short term loans they can save money overall until permanent financing from the bank is arranged or until money is paid out from the sale of another home or property.
Bridge Financing Explained
Although bridge financing is a great option for those who have sold their current home before the purchase of their new home, it is important to note that in rare cases the sale can fall apart. There are many common reasons that agreement of purchase and sale contracts fail. This can include issues with the buyer’s financing or even an appraisal shortfall which can leave the bridge loan borrower in a tough spot. Lenders issue bridge loans based on a firm sale only. If that sale falls through, the seller is forced to re-list and in some cases sell the home for much less than originally agreed upon. If your sale falls through or you are unable to close due to shortfall, contact us today to speak with one of our mortgage agents. Let us help you come up with a customized solution for your unique needs!
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If you would like to know more about how we can help you arrange a bridge loan, get the best home equity rates, or any other mortgage-related issue then please contact us today. You can also fill out this online form for a loan quote here.