Have you heard about bridge loans? What is the definition of bridge loans? How do they work? Are they costly? What are the pros and cons? Do hard money lenders offer bridge loans? Have your questions answered below.
Just like the name would lead you to believe, a bridge loan is a form of funding that closes a financial gap until a permanent form of financing is found. You can acquire a bridge loan as you wait to refinance a mortgage or a long term loan with a conventional lending institution.
Other names associated with bridge loans include:
- Interim financing
- Swing loan
- Gap financing
Bridge loans are short-term debts secured by collateral, usually the real estate being financed. When you get this loan, you will be able to meet your current obligation with the immediate cash flow granted by the lender. Expect a repayment period of up to 12 months and relatively higher interest rates.
If you contact a hard money lender, they can help you arrange for permanent financing. This is one of the best solutions you need when buying a home while your old one is up for sale. By using a bridge loan, you can snap a house really quick even before you sell your old house.
How Do Bridge Loans Differ From Typical Bank Loans?
When comparing bridge loans vs. conventional loans, we focus on 4 things:
- The application process
- Approval and funding
- Loan term
- Interest rate
Typically, a bridge loan is easier to apply for than a conventional loan. The approval process and funding takes a matter of days but in exchange, you pay high interest rates in a relatively short term.
Wouldn’t you accept these conditions if you really need fast access to funds? And even though the interest is quite stiff, you will be able to refinance shortly afterward for a rate that’s favorable to you. Luckily, there are no prepayment penalties with most bridge loans.
What Fees Accompany Bridge Loans?
The types of fees depend on the loan provider, as well as the borrower’s risk. Basically, a bridge loan comes with more charges attached than a traditional bank loan.
For example, $12,000 bridge financing may cost you $2,500. This amount is inclusive of the appraisal fee, title cost, and administration fees. Don’t forget there’s interest to incur if your old house doesn’t sell in time.
Advantages of Obtaining a Bridge Loan
- You may not need to make any payments until the term is up when your old house sells
- Allows you to make a quick purchase on a hot deal
- It gives you the power to acquire a ‘move-up’ home
- You’ll enjoy cash-flow infusion for your venture before you find a long-term financing option
Disadvantages of Obtaining a Bridge Loan
- Increased debt burden
- High-interest rate and extra charges
- No guarantee that the old property will sell in due time
Where to Get Bridge Loans
Finding a good provider for a bridge loan is not the same as walking into a bank and speaking to a mortgage officer. Some lenders are found through traditional banking institutions. Certain credit unions offer bridge loans but they are very hesitant as they prefer funding on long-term basis.
Fortunately, we have hard money lenders who gladly offer bridge financing. While their interest rates may be higher than a traditional loan, they usually do not check the borrower’s tax returns, debt-income-ratio, or credit score. In the event that you need a bridge loan, a hard money lender will not bother you with red tape loan requirements.
The hard money lender can choose to give you a loan if it makes sense for you to bridge a financial situation. They’ll also determine whether you qualify a second mortgage and if you do, they certainly get you one.
So, do you want to buy a house without restrictions or waiting too long before your old home sells? Get matched to hard money lenders today for an expeditious solution. A bridge loan is an effective solution because it guarantees fast access to funds for down payment.
