Bridge Loans

Bridge loans are typically reserved for borrowers with a strong credit history and credit score. While the minimum credit score will vary by lender, a higher credit score will always mean a lower interest rate.

With a bridge loan, you’re likely to experience a faster application time, as well as a faster approval and funding process than you would with a traditional loan. Therefore,you won’t have to wait as long to get the funds needed to move forward with your second home purchase.

Debt-to-income ratio, loan-to-value ratio, credit history, and credit score (FICOⓇ Score) all matter when seeking a bridge loan. You’ll need to have a lot of equity in your current home to qualify, and since you can borrow up to 80% of your home’s value, this math doesn’t always work. It only works if your home has appreciated from when you purchased it or you’ve made a significant dent in the principal balance owed.

Imagine you found your dream home, but you haven’t yet sold your current residence. The seller of your dream home is receiving multiple offers, and you don’t want to risk losing the opportunity by making your offer contingent on the sale of your current home. In this scenario, a bridge loan can be a great solution.

You decide to apply for a bridge loan, which allows you to access the equity built up in your current home. Let’s say your current home is appraised at $300,000, and you still owe $150,000 on your mortgage. With a bridge loan, you can borrow against the equity in your current home, enabling you to use a portion of the $150,000 as a down payment for your new home.

Pros

• A bridge loan offers you the opportunity to buy a new house before you’ve sold your current home.
• You can make an offer on a new home without having to implement a sale contingency.
• A bridge loan provides additional funds in the event of a sudden or time-sensitive transition.
• It presents a helpful short-term solution for financing during periods of uncertainty.
• There is often the prospect of no monthly payments for the first few months.
• There is potential for interest-only payments, or payments that are deferred until you sell.

Cons

• Bridge loans come with higher interest rates and APR.
• Most lenders require a homeowner to have at least 20% home equity built up before they’ll extend a bridge loan offer.
• Many financial institutions will only extend a bridge loan if you also use them to obtain your new mortgage.
• You may own two houses for a time – and managing two mortgages at once can be stressful.
• Trouble selling your property can lead to future issues or in a worst-case scenario, even foreclosure.

Bridge loans are typically used by sellers who find themselves in a tight spot or need to make a sudden change of locale. Bridge loan terms, conditions, and fees can vary greatly between individuals and lenders. Some of these financing vehicles are designed to pay off your first mortgage at the time that the bridge loan closes, while others add new debt onto the total overall amounts owed. Costs can also vary considerably between lenders, and bridge loans can differ greatly in payment structure. For example, some may require you to make monthly payments, while others may be structured to require a mix of upfront and/or end-term or lump sum payment charges.

The primary difference between a bridge loan and a traditional mortgage lies in their purpose and structure. A bridge loan serves as temporary financing, enabling borrowers to bridge the gap between the purchase of a new property and the sale of an existing one. It has a shorter loan term, higher interest rates, and often requires collateral. On the other hand, a traditional mortgage is a long-term loan used to finance the purchase of a property and is repaid over an extended period, typically 15 to 30 years.

Yes, bridge loans can be utilized for renovations or improvements on existing properties. This allows homeowners or real estate investors to enhance the value of the property and potentially increase its selling price. By using a bridge loan for renovations, borrowers can access the necessary funds to complete the project before selling or refinancing the property.