There are a lot of bridges on the coastline of Florida. They serve as an important function to transport vehicles and people to our beautiful beaches and restaurants. However, there is another type of bridge which also serves an important function – a bridge loan.
Bridge loans are short-term loans that can be used to bridge the gap between buying a new home and selling your previous home. For example, you found the home of your dreams, but you need the equity in your current home for the down payment and closing costs in order to go forward and close on your new home.
Bridge loans can be acquired in less time than mortgage loans but aren’t offered by banks or credit unions, they’re usually only offered by specialized lenders
Bridge loans can often be available within 72 hours, as opposed to mortgage loans, which can take 30 to 45 days for approval. They run from six months to three years with a variety of repayment arrangements. You can have a monthly payment, interest-only payment or end with a balloon payment. Bridge loans are also used for investment property when the property is purchased, renovated and flipped or resold for a profit.
Qualifying for a bridge loan is similar to qualifying for a conventional home mortgage. Lenders will check your debt-to-income ratio, the amount of equity in your current home, credit score and income. Having a large percentage of equity and a high credit score are essential to getting approved.
Having an approved bridge loan could make your offer more competitive since there will not be any further mortgage contingencies, practically a guarantee to a seller. It’s also faster than a conventional mortgage, which could be attractive to a seller as well.
The flip side of bridge loans are the higher interest rates, which are beneficial to the lender for short-term loans. Remember, the higher interest rates and fees are out of pocket money, so be prepared with some extra cash. In addition, you are essentially paying two mortgage fees until you sell your property and are able to close out the bridge loan.
If a bridge loan sounds too risky or you’re worried about qualifying, there are two other ways to pull the equity out of your home. Cash out refinance allows you to borrow against the existing equity in your home by taking out a new mortgage in excess of what you need to close on the new property. Home equity line of credit (HELOC) also lets you borrow against the available equity in your home. Most lenders will also limit the amount you can borrow to 80% of your home’s appraised value. Either way you still need adequate equity in your current home to move forward.
Applying for a bridge loan may be beneficial depending on your financial situation and where you are in the buying and selling process. But make sure to weigh your options and consider alternatives like cash out refinance and home equity loans.
Bridge loans are challenging and should be undertaken only by buyers who are fairly confident they can sell their current residence and have the funds to make the bridge loan payments until such time as it can be closed. It’s also important that you have the personality that will sustain the stress that this financial endeavor will likely create. If not, stick to the physical bridges in and around Anna Maria Island; they don’t cost a penny and the views are spectacular.
