Bridge loan helps real-estate or homebuyers take a loan against their current home in order to make the down payment on their new home.
This form of financing may also be helpful to businesses that need to cover operating expenses while awaiting long-term funding.
When used for real estate, a bridge loan requires a borrower to pledge their current home or other assets as collateral to secure the debt — plus, the borrower must have at least 20% equity in that home. Bridge loans also tend to have high interest rates and only last for between six months and a year, so they’re best for borrowers who expect their current home to sell quickly.
What Is a Bridge Loan?
A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. It allows the user to meet current obligations by providing immediate cash flow. Bridge loans are short term, up to one year, have relatively high interest rates, and are usually backed by some form of collateral, such as real estate or inventory.
However, the application and underwriting process for bridge loans is generally faster than for traditional loans. Plus, if you can qualify for a mortgage to purchase a new home, you can probably qualify for a bridge loan — assuming you have the required equity in your first home. This makes bridge loans a popular option for homeowners who want quick access to funds to purchase a new house before they have sold their current property.
How Bridge Lending Works
Often when a homeowner decides to sell their current home and purchase a new one, it can be difficult to first secure a contract to sell the home and then close on a new one within the same period. What’s more, a homeowner may be unable to make a down payment on the second home before receiving money from the sale of their first home. In this case, the homeowner can take out a bridge loan against their current home to cover the down payment on their new home.
In this situation, a homeowner can work with their current mortgage lender to obtain a short, six- to 12-month loan to “bridge the gap” between the new purchase and the sale of their old home. Not all traditional mortgage lenders make bridge loans, but they’re more commonly offered by online lenders. Although bridge loans are secured by the borrower’s home, they often have higher interest rates than other financing options — like home equity lines of credit — because of the short loan term.
Once the borrower’s first home is sold, they can use the proceeds to pay off the bridge loan and they will be left with just the mortgage on their new property. However, if the borrower’s home does not sell within the brief loan term, they will be responsible for making payments on their first mortgage, the mortgage on their new home and the bridge loan. This makes bridge loans a risky option for homeowners who aren’t likely to sell their home in a very short amount of time.
When to Use a Bridge Loan
Bridge loans are most commonly used when a homeowner wants to buy a new house before selling their current property. A borrower can use a portion of their bridge loan to pay off their current mortgage while using the rest as a down payment on a new home. Likewise, a homeowner can use a bridge loan as a second mortgage that covers the down payment for their new house.
A bridge loan may be a good fit if you:
- Have chosen a new home and are in a seller’s market in which houses sell quickly
- Want to purchase a property but the seller won’t accept an offer contingent on the sale of your current home
- Can’t afford a down payment on the new property without first selling your current home
- Want to close on a new home before selling your current home
- Aren’t scheduled to close on the sale of your current home before closing on the new house
Bridge loans also can be used by businesses to take advantage of immediate real estate opportunities or to fund short-term expenses. Businesses typically can find these loans offered by hard money lenders, which finance loans using your property as collateral, and online alternative lenders. These loans charge higher interest rates than other types of business loans.
Some common uses for business bridge loans include:
- Covering operating expenses while a business awaits long-term financing
- Securing the funds necessary to acquire real estate quickly
- Taking advantage of limited time offers on inventory and other business resources
While considering applying for a bridge loans, consider Havelet Finance Limited. To get started make your inquiries below;