In one of our past articles, we define and explain how bridge loans work. Now you want to know under what circumstances they come in handy. Read on to get a better understanding.
By now you understand that not all lenders set standards for debt income ratios and FICO scores when giving out bridge loans. Hard money lenders, in particular, are guided by the viability of real estate in question during the underwriting process. They have to see whether or not your circumstances make sense before giving out a bridge loan.
Below are the main areas that require bridge financing:
1. Move-Up House Purchases
Do you want to upgrade your current house or condo? Then you are going to be a move-up buyer. Maybe you want to relocate to a better and bigger house. That sounds great.
Does this sound like a tricky situation? Until your old house is sold, you cannot qualify a new mortgage from a bank. Unless you sell the current house and move to a temporary place, you will need a bridge loan to occupy a newly acquired house.
One of the most important aspects that need serious consideration is how to finance a newly bought property. Is your old house still under mortgage? You need to be pre-qualified to buy a new house by combining the existing mortgage with the new home’s mortgage payment.
Private mortgage lenders have a leeway to accept high debt-to-income ratios as long as the new home loan is a conforming mortgage.
You are likely to close on the move-up house before you sell your existing residence. What does this tell you? It means at some point you will own two residential properties, hopefully for a short period! It also means you will have two concurrent mortgages.
2. Bridge Loans For Business
The uses of bridge loans extend beyond covering for two mortgages. They also help in business as the borrowers wait for their long-term loans to clear. If your enterprise has a loan with a repayment period of 6 months, but you still need extra cash before closeout, you may consider bridge financing. Your long-term loan will act as collateral.
Many businesses use bridge loans when experiencing cash flow issues before receiving permanent financing. For instance, your venture may be expecting to close equity financing in the next few months but there’s not enough working capital to meet major expenses and inventory. If that is your current scenario, a gap loan will back up your venture until equity financing comes through.
You might also be a serious investor looking to renovate your rentals. Or you need to fund a construction but cannot afford a regular construction loan. A bridge loan will still help in these circumstances.
3. Commercial Real Estate
A commercial bridge loan is used by real estate investors the same way homeowners use it to acquire move-up houses. You could use this loan when vacating an office to a new one. If your company has spotted a strategic building, a bridge loan allows you to snap it up in the shortest time possible.
Last but not least, you might want to use bridge finance to purchase commercial properties which are up to the standards of traditional lending. Such properties include those that require serious rehab or with low occupancy rates.
Think You Could Use a Bridge Loan?
Bridge loans are becoming popular in the real estate sector. Buyers with a lag between buying one property and selling another are turning to bridge loans. Basically, a hard money lender doesn’t care about your credit when giving you a bridge loan.
Want to roll mortgages of two houses as you wait for the old home to sell? What are you waiting for? A bridge loan will give you the flexibility you just need.
Under normal circumstances, you get a bridge loan worth 80% of the merged value of two houses. Make sure you have substantial equity on your current property or sufficient money to put down.
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