Short-Term Bridge Financing Loan
What Is A Bridge Loan, And How Do They Work?
All businesses go through a time when they require extra cash to be able to maintain the cash flow. For example, you are a small to medium sized company waiting for the clients and customers to pay your invoices but the payroll in approaching. In this case you will need to seek some financial alternative to ensure that all your employees/workers get paid on time. This is where a bridge loan comes into play.
A bridge loan in real estate transactions refers to a financing option to provide cash flow during a transitional period. 0ne of the classic examples is a loan amount while moving from a current residence into a new home.
Whether you are entrepreneur with a startup or a seasoned business owner, a bridge loan can be nothing short of a savior in the times of financial turmoil. The best part is that you will never have to worry about long-term repayments and interest rates.
Most of the bridge loans are short-term. This means that you will apply for a loan, and receive the cash to carry out your desired tasks on time. The bank or lender will give you this loan on a short-term basis which is usually from 3 months up to 18 months.
Once you have your money or payment you were expecting to come through, you can repay the loan back the bank or lender. However, this loan is not only for the business owners and startups. As a homeowner, you can use this short-term loan to put more cash in your pockets quickly. You can use this loan to finance a new home or pay off an existing debt obligation. However, like any form of financing, a bridge loan comes with a variety of costs attached.
You must also remember that this financing option does not replace a traditional mortgage in any shape or form. To learn more about bridge loans, simply read on.
What Is A Bridge Loan?
A bridge loan is a form of short-term financing that can serve as a source of funding and capital until you or your company secures permanent financing or gets rid of an existing debt obligation. A Bridge loan (also known as a swing loan) is typically short-term. It can last on average from 6 months to 1 year and is most helpful for real estate transactions.
You can obtain a bridge loan and effectively use it as a means through which to finance the purchase of a new home before selling your existing residence.
Most home sellers would ideally prefer to wait until their house is under contract before placing an offer on a new one. This will allow the home seller to use monies from the sale of their existing property to help finance a new real estate acquisition.
Are you unable to offload your property and facilitate such a sales transaction?
In that case, a bridge loan can provide you with the funds needed to move forward on purchasing a new property. In simple terms, a bridge loan gives you access to additional monies to purchase a piece of real estate. It also allows you to tap into added funds or any equity that you hold in your current home prior to its actual sale.
It is common for homeowners to be in a situation that needs a sudden transition—for example, having to transfer to another location for work-related purposes quickly. In such instances, a bridge loan can help bridge the gap between homes.
A bridge loan can help finance your way through this transitional time period. In addition, it can also help avoid having to make sale-contingent purchase offers on new properties – especially if you’re trying to shop for a new home in a hot market.
Although homebuyers tend to shy away from this approach, this type of offer provides the option to back out of the contract if your current home doesn’t sell. However, it is secured with your current home as a form of collateral, as is a conventional mortgage.
Remember, a bridge loan does not replace a traditional mortgage, and you must repay the borrowed amount within roughly 1 – 3 years’ time.
How Does A Bridge Loan Work?
Just like any other loan, you can use the bridge loan in a real estate world as well. Sometimes an investor, developer or buyer may be awaiting their cash to come in from a different source. If you are such as person that you can actually apply for a bridge loan to make a payment with this financing option and get the house or whatever renovation work you want to get done.
Once you do receive your payment which will hopefully be before the maturation date of your bridge loan, you can return the money back to the bridge loan lender.
A bridge loan can help you as a home seller if you are in a tight financial situation or need to move from your current location. At the same time, bridge loan terms, conditions, and fees can vary greatly between individual transactions and lenders.
As an example, some of you may require to only make monthly repayments. On the other hand, other loans may require the borrower to pay some additional charges. These charges can be a combination fo upfront fee, end-term charges, lump sum payment fee. A lender may charge one, all or a mix of all afore-mentioned three fees.
So, if you are looking for a bridge loan, you must do some research in order find out everything there is to know about the lender. You must thoroughly go through the terms and conditions of the loan a lender is offering.
Do not simply listen and believe what the lender promises. It is always a good idea to ensure that you get all the fees, charges, fines, terms and conditions in writing before you sign that contractual agreement.
If you are not sure about the terms and conditions, it is wise to seek assistance of a financial advisor. This will not only help you find the best lender and the best bridge loan in town, but also give you peace of mind that the loan you are getting has no hidden fee or charges.
Common reasons to get a bridge loan include:
Inability to afford a down payment without first selling your current house.
Pressing needs to secure a new home quickly.
The closing date for a new purchase is scheduled after the closing date for the sale of your home.
You’d like to secure a new property before listing your current residence.
Sellers in your desired area aren’t comfortable with contingent purchase offers.
In general, two main options available for those seeking a bridge loan are:
To use the bridge loan as a second mortgage to put toward the down payment on their new home until they can sell their current home.
To take out one large loan to pay off the mortgage on their old home and put the remainder of monies borrowed toward the down payment on their new residence.
Similarly, bridge loans tend to:
Run for 6-month or year-long terms.
Be secured using the borrower’s current home as a form of collateral.
Only be issued by lenders with whom you agree to finance your new mortgage as well.
Vary in amounts of interest charged, with charges typically hovering slightly above the prime rate.
You must also pay close attention before you think about securing or applying for a bridge loan. you must remember that a bridge loan will work just like your traditional mortgage by a bank or lender. Similar to any other loan, the lender will look at a variety of factors to ensure that you are not a risky borrower and that the lender will see his money back.
If you have a good credit history and fulfill other requirements, the lender will consider you a low risk borrower and offer you maximum loan along with favorable terms and conditions. On the other hand, if you had a low credit score, the lender will consider you high risk candidate. In this case, the lender may offer you condition loan with stricter term and conditions such as collateral and/or higher interest rates:
Credit score and credit history
Debt-to-income ratio (DTI).
However, most institutions offering bridge loans will allow you to borrow a maximum of up to 80% of their loan-to-value ratio (LTV). In other words, you will typically need a minimum of 20% equity in your current home in order to qualify for a bridge loan package. There may be other additional financial qualifications that you may have to meet.
Common Home Bridge Loan Rates
Did you know that the interest rates that are associated with your bridge loans are comparatively higher than any other conventional type of loan? So, yes while you may be able to get immediate access to cash, it may come at an added cost of higher interest rates.
That said, you will be able to maintain a healthy cash flow within your business. These higher interest rates also include the charges that a lender place. These additional charges can range from roughly 2% higher than any of the other prime rates available in the market.
Therefore, if you do not get a bridge loan, try to pay if off as soon as you can. The charges may vary by the lenders. However, sometimes, the lender may also charge you to pay an extra fee or charge if you wish to pay back the whole bridge loan amount all at once.
In this case when you are paying back the loan in lump sum amount, you must ask yourself if paying back the loan in monthly installments worth it or would you save any money by paying it back in a lump sum amount.
Just like traditional mortgages, bridge loans also incur closing costs. This cost can reach a few thousand dollars in expenses, a percentage of your loan's value, and origination fees. However, the lenders are very careful and may look or request for an appraisal. In this case you will have to bare some extra charges. This means, you will end up paying an additional fee or cost required for an appraisal as well.
A quick piece of advice here, though – there is limited protection for the buyer in case the sale of your current home falls through. Therefore, it is important to read the terms and conditions associated with any bridge loan offer.
The reason is that the lender secures the bridge loan with your existing property. The lender may move to foreclosure if you default on payments. Therefore, you will want to carefully consider how long you can afford to go without financial relief if the sale stalls.
You must make ensure to avoid overextending yourself on any amounts borrowed. You will also find it helpful to do extensive research into the current real estate market and find out how long it takes for homes to sell in your local area.
Pros and Cons of Bridge Loans
Just like other forms of financing, there are advantages and disadvantages associated with a bridge loan. For example, you must consider the following upsides and downsides before borrowing.
Pros
It offers you the opportunity to buy a new house before selling your current home.
You can make an offer on a new home without implementing a sale contingency.
Provides additional funds in the event of a sudden or time-sensitive transition.
Presents a helpful short-term solution for financing your way through periods of uncertainty.
Often the prospect of no monthly payments for the first few months.
Potential for interest-only payments or payments that are deferred until you sell.
Cons
Bridge loans do come with a much higher APR as well as interest rates
Most lenders will require you as a homeowner to own at least 20% home equity built up prior to extending you an offer to get a bridge loan before they’ll extend a bridge loan offer.
Many financial lending institutions will offer you a bridge loan on one condition and that is if you are going to use this borrowed many to secure a new mortgage
You may own more than one for a time. This makes it really difficult for you to manage 2 mortgages all at once.
If you are having a hard time selling a property, this can lead to a lot of future issue. Additionally, consider a worst-case scenario because that can actually end up in foreclosure.
Whether you are business owner, a developer or a home buyer, you can search for a bridge loan to cater your needs. There is a wide range of lenders out there offering bridge loans in all shapes and sizes. Some of the most common lending institutions include banks, private-lenders, credit unions and many other privately financed lending companies.
However, no matter who the issuing lender may be, it is highly possible and very common for your existing mortgage lender to be the originator or primary source of such bridge loan programs.
If you’re interested in pursuing a bridge loan, your lender should be your first point of contact. As you enjoy a good rapport with your existing lender, they might be able to offer you a bridge loan at a more competitive rate and favorable terms.
Pro tip: As you start searching for a financing partner, avoid lenders offering quick access to capital. Such lenders may charge exorbitant rates for their services and boast less of a proven track record in terms of strong performance or customer service.
Bridge Loan Alternatives
It is not always necessary to seek a bridge loan if you need temporary help with your finances. There are other alternative means of real estate financing to help you make sure that you can sort out your financial issues.
Home Equity Loans
Home equity loans are very popular alternative financial solution to bridge loans. Under this form of financing, a lender secures the loan using your current home as collateral. You are eligible to borrow an amount against the existing equity you hold within your home.
Home equity loans are typically long-term ranging up to 20 years. Additionally, the interest rate for a home equity loan is more favorable compared to a bridge loan. While it is more affordable than a bridge loan, obtaining a home equity loan will still require you to carry two mortgages or even three. This is only if you purchase a new home and fail to sell your original residence in a prompt fashion.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) essentially takes the form of a second mortgage offering a better interest rate, lower closing costs, and added time to repay borrowed sums. You can use the borrowed amount from your HELOC for any purpose. For example, you can use it to make home improvements and other upgrades. Please you must remember that some HELOCs lenders may ask you to make a prepayment fees.
80-10-10 Loan
An 80-10-10 loan provides financial support to buy a new home with less than a 20% down payment while avoiding additional fees due to private mortgage insurance (PMI). Under the terms of an 80-10-10 loan, you pay a 10% down payment and obtain two mortgages. One will be for 80% of your new home’s asking price, whereas, the other will be for the remaining 10%.
After selling your current home, you can take any leftover funds after paying off any outstanding balances and use that money to pay off the 10% second mortgage on the new property.
Personal Loan
Do you have a strong credit history, sound employment, a solid track record of timely expense payment, and a good debt to income ratio? If yes, you might also look into personal loans secured against your personal assets. The terms and conditions may vary by lender.
The Bottom Line
A bridge loan can come in handy in certain circumstances, especially when you are in pressing need of buying a new home before an old one has sold. A bridge loan can help you out of a tight spot or help you more quickly scoop up a much-needed new property in a hot market. Furthermore, it can also provide a costly acquisition to come by.
Getting a bridge loan will give you access to more cash in hand to spend on real estate. However, if your current home doesn't promptly sell, your overall debt load will increase, and you may wind up paying off multiple loans. Therefore, it is best to wait to sell your old house before moving forward to acquire a new property.