If you are in the transitional period in the home buying process and are in need of cash flow, then you may want to look into bridge loans. Click here for more.
You’ve seen the perfect home, but your existing house hasn’t sold yet. What do you do? Wait and hope you sell your place fast enough.
Or you could get one to secure your new home now! If you are buying a house, loans might be the key to your financial success. In this article, we will go over what bridge loans are and how they can help you get into that beautiful home of yours!
Just how does this work? Read this short fact-packed article showing how you can get on.
What Are Bridge Loans?
A bridge loan is a type of short-term loan that helps finance the purchase or construction of property until permanent financing can be obtained.
With existing property, bridge loans close the gap between funding for property acquisitions while buyers wait on long-term mortgages to close.
A bridge loan is a way to cover the gap between your old mortgage and your new home. It can be helpful when you have an approved offer on a house but not enough money for a down payment, or if you need to close to secure your new home.
How Do They Work?
A bridge loan is usually a short-term, interest-only loan that covers the deposit and settlement costs of your new home. They are secured against your existing home so do not affect the loan to valuation ratio to finance your new purchase.
Bridge loans are typically used to bridge the gap between when you purchase your new home and when you sell your current home. The length of time varies by lender, but most bridge loan contracts will have a term lasting no more than 12 months. Your monthly payments will be calculated based on what you owe to close on both properties as well as any other costs associated with the bridge loan.
How Much Can You Borrow?
You can use a bridge loan to provide the down payment on your new home. You will need to show a suitably secure income and enough value in your property.
The rule of thumb with bridge loans is your existing property needs to hold enough value to cover a 20% deposit on the new house and all costs of purchase. You cannot borrow more than 80% of the current value of your existing home when securing a bridge loan.
When Should I Get One?
We would recommend you seek pre-approval for a bridge loan before looking for your new home. This saves you time and money and stress. Then your bridge loan is ready for you when you need it. When you apply for loans ensure you have all the paperwork collated for your lender.
It is a good idea to speak to a bridge loan specialist for more information. They will be able to help you determine whether or not a bridge loan is right for your situation.
Knowing how much you can borrow on a bridge loan is important. This will help you buy the right property for your needs and in a location that suits you best.
At the same time, we recommend you seek preapproval for your mortgage on the new home.
This will help you get a more accurate idea of what you afford for your new home. This information will help you find the right property for your family’s needs.
What Are the Benefits of Getting a Bridge Loan
There are several reasons why bridge loans may be the best for you. A bridge loan might:
- Help you avoid having to rely on credit cards or payday lenders, which often have high fees and interest rates
- Pay off debt
- Help you avoid having to sell your current home at a loss
- Help cover the costs of repairs if needed before closing on your new property
- Offer more favorable terms than other types of financing
For example, they often have lower interest rates and higher loan amounts available than traditional mortgages. A bridge loan is typically short in duration (usually one year or less which gives you the time to sell your current home or find other financing or mortgages.
What Are the Drawbacks Associated With a Loan?
They are short-term cash loans that bridge the gap between when your house is sold and you receive equity. These risks come in two varieties: risk of not being able to pay the loan by the due date and risk of losing too much equity because of additional legal and bank fees.
If your house does not sell before the bridge loan is due, you will need to refinance it or get a new bridge loan. If unsuccessful, you may face the threat of foreclosure, or have to sell your house lower than the market value, resulting in equity loss.
The additional costs of financing, legal costs, and interest charges can eat into cash flow during the period of the loan.
Who Can Qualify for a Loan
To qualify for a bridge loan, you will need to have at least 20% of your new home deposit and settlement costs available in cash or equity from your current house.
You’ll also need excellent credit scores, be able to afford monthly payments on both properties, and own property that is worth more than what you owe on it.
If you’re a first-time homebuyer, they may not for you because your credit history won’t be long enough to qualify yet.
Is a Bridge Loan Right for Me?
Loans are ideal for buyers who need a bridge to buy their next home, but they’re not the best option for everyone.
If you have less than 20% of your new property’s down payment in cash or equity from the sale of an existing home and excellent credit scores that can generate monthly payments on both homes without undue hardship, then loans may be a good option for you.
If bridge loans are an ideal solution for your situation, look at options today to see how we can help make buying your next home easy and affordable!