Last Updated on August 30, 2021
Everything You Need to Know About Bridge Loans in 2021
Bridge loans are a short-term loan that is used to finance the purchase of a new property. They can be an excellent solution for those who want to buy and sell their current house before finding another one. With Bridge Loans, you don’t have to worry about being stuck in your old home while you wait for a sale because it will not affect your new mortgage application process. This article provides everything you need to know about bridge loans so that you can decide if this type of loan is right for you!
You will learn about:
- What Is A Bridge Loan
- How Does A Bridge Loan Work?
- How to Apply For A Bridge Loan
- The Benefits of Getting a Bridge Loan
- The Risks of getting a Bridge Loan
- Frequently Asked Questions About Them
What Is a Bridge Loan?
A bridge loan is a short-term, high-interest rate loan that can help meet obligations until the person or company has secured permanent financing. Bridge loans are usually backed by hard assets such as cars, jewelry, or even real estate. It is best suited for those who need a quick loan to meet their financial obligations. Bridge loans are also sometimes used by those seeking to buy and sell the same property simultaneously.
The bridge loan can serve as a substitution for the down payment and helps the borrower get over the hurdle of requiring a large amount of cash needed at closing time. Bridge loans are also great for real estate investors who need to take out a short-term loan for renovation or repair the property before it is ready to be sold. You need a good credit score of at least 700 and a steady income to qualify for this type of loan. The whole process can be completed within a week and can help you get over the difficult period that usually comes with waiting for permanent financing.
How Does a Bridge Loan Work?
Any individual or business can use a bridge loan. The company that offers the loan called the “lender,” will evaluate your credit history to determine if you are a good candidate for a bridge loan. If they decide that you are, they will provide you with a specific amount of money (based on your needs) and a specific amount of time to repay it. Like any other loan, you will be required to provide collateral, although the lender may rely on your credit history to decide how much collateral is required, and pay interest rates.
How to Apply for A Bridge Loan?
If you are looking for a way to buy and sell your home simultaneously, one of the best options is to apply for a bridge loan. The process is quite simple. To get started, you will need some general information that includes your full name, address, social security number, and date of birth. You will also need to provide your employer’s information, how much you wish to borrow, and the length of time you will need the loan. You will also need to provide the lender with information regarding your monthly income, the value of your home, and any other real estate or hard assets that you wish to use as collateral. The interest rates for a bridge loan are quite high, and you should not be surprised if they range from 8-10.5 percent. Bridge loans bridge the gap between you getting the financing you need and your loan application process.
The Benefits of Getting a Bridge Loan
Bridge loans have some important advantages that will help you if you require short-term financing. These include:
Easier to Get the Money
Long-term financing can take months to be approved. However, bridge loans are easier to get because they provide immediate cash flow, but with higher interest rates.
Fast Access to Cash
Bridge loans offer you the funds you need quickly and let you move forward with your plans without unnecessary delays. If you ever need to borrow money quickly, bridge loans can help.
While the interest rates are much higher than other types of financing, they will work for those who don’t have an option for a more affordable loan.
No hidden fees
Bridge loans are all-inclusive, and there will be no hidden fees that could result in many unexpected payments.
The best thing about bridge loans is that they can be used for many different reasons. You may decide to use them to buy a new home, renovate your current property, or even pay off some unexpected expenses. There are many ways in which you could choose to take advantage of this type of loan.
The Risks of Getting a Bridge Loan
While bridge loans have some great advantages, they also have several drawbacks that potential borrowers should know before applying for one. These include:
The interest rates for bridge loans are significantly higher than standard home equity loans and mortgages.
For this reason, you will need to evaluate if the benefits of getting a lower rate on your mortgage outweigh the cost of paying off a much higher interest rate loan.
Bridge Loans are Short-Term
Bridge loans provide you with money for only short periods. The loan length will depend on your lender, but this type of financing is usually only available for a few weeks at the most.
The Debt-to-Income Ratio Rules
Most lenders will require you to have a good debt-to-income ratio to qualify for bridge loans. This means that you will need to have a proven record of being able to pay off your monthly bills in addition to the loan payments on time each month. If you don’t have an excellent credit rating, this can be a major problem.
A Bridge Loan Could Lose its Advantage
Bridge loans will no longer be the best option if you can close on a home loan quickly or successfully sell your property.
It would help if you did everything in your power to avoid taking on debt unnecessarily while looking for more affordable and flexible financing options.
Frequently Asked Questions: FAQ
Who qualifies for a bridge loan?
You can apply for a bridge loan and quickly get the necessary funds to meet the minimum requirements. However, your credit score will also determine how much money is available to borrow, so it’s important that your reputation as a borrower remains strong when applying.
Do banks do bridge loans?
Private lenders are the most likely to offer bridge loans. However, it is done on a strictly short-term basis, and while an institutional lender may provide financing for longer periods, it requires extensive documentation before funding can occur.
Is my current home equity loan a bridge loan?
No. Even though you have bridged the gap between short- and long-term financing, your loan is still intended to be repaid over an extended period.
Also, many home equity loans are offered with fixed interest rates that make them quite different from their counterpart.
Do you need a down payment for a bridge loan?
Yes, many lenders will require a down payment. Make sure to ask about this when you are filling out the application for financing.
The benefits of getting a bridge loan are worth the risks. In the long run, you could save yourself from financial ruin by applying for one before your business fails or before your credit scores drop any lower. Bridge loans typically can be used to buy inventory and pay off debts so that you can keep going strong as an entrepreneur. While it’s not always easy to get approved for these types of short-term loans, they’re available if you need them most!
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.