If you’re considering selling your current home while planning another move, a bridge loan will provide you with all the required financing to make your dreams come true. Many Dallas mortgage companies and banks offer this type of financing to help potential homebuyers navigate their home-buying journey easily.
In today’s article, we will discuss everything you need to know about bridge loans, the way they work, their pros and cons, and more. Thus if you’re looking to sell and buy a house simultaneously, stay tuned and keep reading, as you will find some pretty amazing stuff over here.
Bridge Loans Explained
By definition, a bridge loan is a short-term financing that lets borrowers borrow money for a short amount of time. In other words, homebuyers can use bridge financing to bridge the gap between selling an existing property and buying and moving to another house. Let’s take a simple example: You already live in a house but have to relocate to another place due to better work opportunities. In this case, a bridge loan can help with the cost of buying a new house before selling your old one.
You can also benefit from a bridge loan if you want to purchase a property from an auction. Because most auctions require you to pay instant cash, you may apply for bridge financing to fulfill your needs immediately, even if you haven’t sold your existing property yet.
Unlike typical bank loans that take several months for approval, a bridge loan usually takes a few days to process. Also, it enables you to apply for varying sums of money.
The only downside? Bridge loans are believed to be a high-risk investment. Why? Because you have to set an asset against your loan to get approval. Failure to repay your loan in time may result in losing the asset secured against it (a single property or multiple properties).
How Do They Work?
Not all bridging loans are alike. While some completely pay off your old home’s first mortgage, others add more to the existing debt. Also, these loans vary in their costs and terms and conditions. The payment schedules also significantly vary from one loan type to the other. For example, some bridge loans come with monthly payments, while others require you to pay interest in lump sum or upfront.
Despite all these differences, there are a few characteristics that most bridging loans share in common. For instance, almost all bridging loans run for a period of six to twelve months and are secured by the borrower’s existing property (usually an old house). Besides this, a lender usually won’t extend your loan unless you agree to finance your new property with the same mortgage company.
Types of Bridging Loans
There are two types of bridging loans, including closed bridge loans and open bridge loans.
- A closed bridge loan features a fixed repayment date. This type of loan is most appropriate for you if you have already exchanged contracts and are waiting for the selling process of your old house to complete and close.
- An open bridging loan comes with no fixed repayment date. You will get roughly a year or two to repay your loan as a borrower.
Regardless of the type of loan you qualify for, your lender would ask you to come up with a clear loan repayment strategy. They may also ask you to provide proof of the new property/home you’re about to invest in
The best thing you can do to avoid the risk of losing your property in collateral is to work on a backup plan – something you can use and follow in case your primary repayment strategy fails for some reason.
How Much Can You Borrow with a Bridging Loan?
As a general rule, a borrower is eligible to borrow a maximum LTV of 75% of the total value of their property. Let’s suppose the purchase value of your house is $400,000, so you will require $100,000 to begin with.
Here it is also essential to know that you’re eligible to borrow more if you’re taking out a first-charge loan instead of the second one.
Eligibility Criteria
Similar to any other loan, your lender will look for certain credentials while evaluating your application for acquiring a bridge loan. These essentials include your DTI, your equity, and your credit history.
In order to proceed with your application, you might want to contact a specialist broker, considering bridging loans are not typically offered by high street banks. As mentioned above, you’ll have to prepare and prove everything that adds to your points and make you a qualified borrower in front of your lender.
Upon approval, solicitors will move forward with conveyancing, eventually leading to the release of funds.
Pros and Cons of Bridge Loans
Pros:
- Quick access to money
- You can choose your repayment schedule
- Huge sums of loan money can be granted
- No contingency required
- You can avoid PMI by paying a 20% down payment initially
Cons:
- Bridge loans are high-risk loans
- Higher interest rates
- A borrower may have to pay a setup fee, which will add to the total cost of their loan
- 20% down payment requirement
- It can be hard to qualify
Costs of Acquiring a Bridging Loan
A bridge mortgage usually comes with higher interest payment requirements. Apart from this, you may also have to bear hefty closing costs. There are several costs associated with this type of loan, including an application fee, an appraisal fee, an escrow fee, an origination fee, an underwriting fee, and more.
When to Consider a Bridging Loan?
A bridging loan might be a good option for you if:
- A seller of your new chosen home isn’t ready to accept the contingency offer
- You don’t have enough money to pay a downpayment unless you sell your existing home
Key Takeaways
A bridging loan can be the best option for you if you’re already in the phase of selling your current property and buying a new one. Just ensure you have a solid repayment strategy in hand, along with a backup plan in case your primary plan does not work for some reason.