What is a bridge loan?
A bridge loan, or gap financing, is one way to receive financing when caught in the middle of a home purchase. Predicated on an expectation of upcoming funds, bridge loans assist in getting someone from point A to point B. In the real estate industry, borrowers can pursue bridge loans if they are still waiting for their old home to sell when closing on a new home. A bridge loan may help pay the down-payment on their new home or tie loose ends on their old home, and everything in between.
How does one qualify for a bridge loan?
Exact eligibility requirements can vary from lender to lender when borrowing a bridge loan, but typically these loans are given to borrowers with good credit and low debt-to-income ratios. Other conditions that improve your eligibility for a bridge loan include having an existing first mortgage, being more likely to close on your home purchase before selling your current home, and owning two homes as a result of your financial timeline.
How do bridge loans work?
Bridge loans are typically offered for up to 80% of the combined value for both properties, and can have interest rates from 6% up to 16%. Usually the loan is used to cover any lingering costs from the old property, and then used towards the new home. Bridge loans can also be opened on top of the existing property’s mortgage, basically as a second (or third) mortgage. There are many costs associated with bridge loans. but these are meant to make up for the quick turnaround that bridge loans provide. These high costs can be curbed by quickly paying back the bridge loan once you’ve moved out of this transition phase.
What are the risks associated with bridge loans?
High interest rates and other costs can hang over your head when it comes to bridge loans, especially if your housing timeline goes on longer than you expected. If conditions in the real estate market make it exceptionally difficult for your current property to sell, then the bridge loan’s benefits will be swiftly outweighed by its burdens. The real estate industry is fairly difficult to predict, and bridge loans may make your place in a volatile market even worse.
As always, it is important to do your research and be knowledgable about your own housing and financial situation before making the decision to acquire something like a bridge loan. Happy researching!