Bridge loans are very often used in real estate transactions. The seller of one home is also the buyer of another home and additional funds are needed to “bridge” the two transactions together.
What are Bridge Loans?
Bridge loans are a short-term loan option, between six months and a year. Providing immediate capital until the borrower can either fully satisfy the existing debt or can secure permanent, long-term, financing.
Why Bridge Loans?
In a perfect world, homeowners would sell their new home and then close on their new home; however, it doesn’t always work out that way. Bridge loans are perfect for those who:
need to move quickly,
close on their new home before closing on their own home,
can’t put down payment without selling their current home,
are moving to a new city/relocating, or
don’t want to complicate real estate transactions with contingencies.
Many buyers and sellers are hesitant to make or accept an offer on a home with an “upon sale of home” contingency. Many things can go wrong when buying and selling a home and that is the biggest contingency that scares buyers and sellers away.
How Do Bridge Loans Work?
There are traditionally two options for bridge loans:
as a second mortgage, used as a downpayment until the current home is sold, and
a larger loan used to pay off the first home’s mortgage and cover the expenses towards the new home.
Bridge loans are available through conventional banks and well alternative lenders and are considered secured financing. The current home is used as collateral against the loan and is typically only offered by the lender who is financing the new home.
Lenders check your credit debt to income ratio, and the loan to value ratio on the home. Bridge loans require at least 20% equity in the current home and carry rates that are slightly above the prime rate. Bridge loans come with closing costs and may require borrowers to pay for an appraisal and inspection on a current loan.
While bridge loans present a very unique and viable option, it’s important to keep in mind the risks as well. There is a possibility that you may own two homes at one time, thus having two mortgages. How long can you handle two mortgages if the sale on your current home takes a little longer than expects?
Repayment terms vary from lender to lender. It’s possible to make interest payments only for a couple of months, or have no payments for the first few months. The goal of bridge loans is to provide funds during a transitionary period. Pairing with a lender that’s interested in complimenting your needs throughout the process is very important.
Contact Hornet Capital Solutions to get started today.