Bridge Loan – A Look at the Advantages and Disadvantages

If you are looking to buy a new house either to live in or for short-term investment purposes, chances are that you will need to secure a loan for the buy.

It’s not your average home buyer who has the necessary cash on hand for such a purchase. The problem is that regular home loans require a lot of time and qualifications to secure.

In that time, the house you are looking at maybe grabbed up by another buyer. Or, if you already own a home, you most likely will not qualify for a regular home loan until you first sell the house you are living in now.

One option exists that can help in these situations and that is a bridge loan. A bridge loan is a short term loan devised to secure a house quickly and without many of the restrictions of a regular mortgage.

With a bridge loan, which ranges from 12-36 months, you can secure your new home using the equity on your existing home.

This can be used as well for real estate investment when flipping houses for quick turnaround and profit. As with every loan, there are some advantages and disadvantages to a bridge loan.

Advantages

  1. You can use your existing equity as collateral for the bridge loan to secure your new home before you sell your existing home. The bridge loan is then paid off when you sell your original home and then you can qualify for a regular mortgage.
  2. There are no set qualification guidelines or limits for a bridge loan like there are for regular mortgages. The bridge loan is granted by the underwriter on his own judgment as to if it makes sense.
  3. There is more leeway in regards to your debt-to-income ratio if it is run through an automated underwriting process.
  4. Bridge loans are fast. When time is of the essence a bridge loan can make all the difference in securing the new property.
  5. The bridge loan may be able to be turned into a regular mortgage by the same lender at a later date.

Disadvantages

  1. If you take out a bridge loan on a new home before you sell your original home, then you will have to make both loan payments until you sell your home. For that interim, you will own two homes.
  2. Bridge loans operate with a higher interest rate. Even if you strike a deal for delayed payments, of up to four months, you will still have to pay the interest which can range anywhere from 2 – 4 points above prime.
  3. Fees for bridge loans can be excessive and will include: administration, appraisal, escrow, title policy, notary, recording, courier, and loan origination.
  4. A bridge loan usually only covers a maximum of 80% of the new properties market value. This means you must have equity in your existing home or cash on hand to cover the other 20%.
  5. Terms of bridge loans vary widely. You must shop around extensively to get the best deal.

Using these advantages and disadvantages to the bridge loan should help you in considering if this is the best option for you and your circumstance. Good luck and watch those rates!

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