What is a Bridge Loan and Why are They Growing in Popularity?

In the last few years the real estate market has taken many twists and turns What is a Bridge Loan and Why are They Growing in Popularity?and as such the way that property is bought and sold has changed quite a bit. One of the ways in which it is currently changing is an increase in homebuyers considering a bridge loan.

What is a bridge loan?

This is a short-term loan with the purpose of providing financing to an applicant during a time of transition. Currently, the most often transition for which a bridge loan is used is at a time of selling a home and purchasing a new one. It is often used by homeowners that need a quick transition such as relocating for work. A bridge loan can help an applicant with the cost of purchasing a new home before they have sold their old one.

A bridge loan is secured through the collateral on the current home you own. A bridge loan is not a substitute for a mortgage it is only short-term help designed for repayment within six months to three years.

Related: Is It Still A Good Idea to Invest in Real Estate?

The details of how a bridge loan works

This is most commonly used by home sellers who find themselves in a tight time crunch. Each bridge loan can differ greatly from the next as far as specific terms, costs, and conditions. There are some bridge loans that are laid out to fully pay off the first home's mortgage when the bridge loan closes. Yet there are other types of bridge loans that will combine the payment on the sold property with the payment of the newly purchased property.

Some bridge loans also offer different ways of paying interest. Some loans might carry a monthly payment and others might require upfront,  end-of-term, or lump sum interest payments.

Most bridge loans carry the following characteristics, however:

The loan lasts from anywhere between 6 to 12 months and is secured by the applicant's current owned home at the time of loan issuance

A bridge loan is hardly ever extended except in a rare case where the borrower agrees to finance the home they are about to purchase with the same bank

Bridge loan rates can range anywhere from the current prime rate to the prime rate with an additional 2%

The process of applying for a bridge loan can look very similar to that of a traditional conventional mortgage loan. One of the most notable ways in which it resembles a traditional loan application is an evaluation of your credit score and debt-to-income ratio. With a bridge loan and majority of lenders will only lend out up to 80% of the equity of your current home.

Closing costs with a bridge loan can be around a couple of thousand dollars in addition to 2% of the loan's original value. Bridge loans also come with origination fees and this is before closing on a mortgage loan to purchase a new home.

The benefits of a bridge loan

A bridge loan gives a borrower cash in hand allowing them to have funds to be used for time-sensitive quick transactions such as making a down payment on the purchase of their next property.

Getting approval for a bridge loan can be a lot quicker as compared to approval on a traditional conventional loan.

There's more flexibility to the payments on a bridge loan. There is an option to defer payments until your current home sells as well as making interest-only payments.

There are no contingencies required for a bridge loan approval such as having a property appraised. Traditional loans almost 100% of the time will make a home appraisal mandatory for approval. It also lifts the need for a homeowner to make their offer on a new home contingent on being able to sell their current home. It allows a homeowner to settle into a new home even if their current home has not sold.

The drawbacks of bridge loans

You could end up in a situation where you own two homes at the same time which can turn into twice the amount of mortgage payment.

A bridge loan still requires the standard size down payment of at least 20%  through having this amount of equity in their current property.

A lender might only agree to a bridge loan if the applicant agrees that they will seek a regular mortgage for their new home through the same lender.

Bridge loans often come with higher interest rates and APR than traditional conventional loans.

A bridge loan can be helpful to homeowners that need to consider purchasing a new home and see themselves having to put an offer in before they are able to sell their current property.

A bridge loan can also help a current homeowner to have their offer accepted on a new home where the owners of that new home are not accepting offers contingent on another home's sale.

It is always best to make sure you talk over your loan options with a trusted mortgage professional before going after a bridge loan. In some cases, they can be very helpful but in others, there may be better options available.

For more information on real estate in southern Maryland please contact us anytime.

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