A bridge loan is a short-term loan that enables an individual or company to “bridge the gap” during the time that is needed to secure long-term financing. These loans are frequently used to buy real estate and to cover long-distance moving expenses when families relocate. Bridge loans are also helpful in business to cover weekly payroll expenses or the cost of restocking inventories.
Bridge loans can supply the immediate cash flow that many other loan types cannot offer. The majority of these loans have terms equaling six months to one year. Some lenders offer shorter or longer terms, so if you need a customized repayment schedule, shop around for your ideal lender. Bridge loans are also known as “interim loans,” “gap loans” or “swing loans.”
Bridge loan borrowers include individuals and companies from many different economic levels. These loans can make it possible to acquire a new property or cover business expenses until a larger, longer-term type of financing is approved. These interim financing aids do have high-interest rates and usually require collateral. Yet paying this higher interest over the short-term can be well worth the opportunity to bridge a financial gap for achieving an important goal.
When You Should Apply For a Bridge Loan
Securing a bridge loan can be very helpful for individuals and business entities in various situations, including the following:
- Home Purchases. Many homeowners who need to bridge the financial gap between buying a new home and selling their existing residence use these loans. If you want or need to buy a new home before your current residence is sold, a bridge loan can be the ideal solution.
With this temporary or short-term funding, you can afford to purchase your new home. You can then find a good buyer for your existing home afterward without experiencing financial difficulties. When you sell your old home, you will have the monetary reserves to easily repay your bridge loan.
- Home Moves. If you are moving your household to another city or state due to a job promotion or new employment position, a bridge loan can help. Even if you have already bought a residence in your new location and sold your current home, you may need extra cash flow. With this extra loan funding, you can cover all of your moving expenses without straining your budget.
- Company Relocation Services. If you own a business that is relocating to a different region, you can use a bridge loan for short-term moving expenses. Your move will most likely involve packing and transporting office or factory equipment and furnishings. With the funding that you obtain from a bridge loan, you can cover all of your moving expenses without revising your monthly budget.
- Business Property Acquisitions. Large to mid-size companies and corporations often need to acquire more property for operations as they expand. Bridge loans can be essential aids for these business entities to successfully buy more real estate. They can purchase attractive properties on the market without waiting until they secure longer-term financing.
- Recurring Business Expenses. Certain businesses like product sales companies need gap financing on a regular schedule. They often need rapid funding to cover the cost of restocking inventories as products sell out. Consulting firms often need interim financing to meet regular payroll and office rental payments each month while waiting for clients to pay for services rendered. Bridge loans offer immediate funding to cover their ongoing expenses.
Important Facts to Remember About Bridge Loans
Most lenders approve bridge loans for borrowers who have excellent credit ratings. Having a low debt-to-income ratio is also important for securing this interim financing. Bridge loans offer borrowers the advantage of combining the mortgages of two houses, the borrower’s current house and new home. This enables the borrower to close the deal to buy a new residence before selling their existing home.
Yet, in most instances, lending agents offer real estate bridge loans equaling 80 percent of the combined values of the two home properties. To finalize the purchase of a new home, the buyer needs to have enough equity in their existing home or sufficient cash available to buy the new residence.
Fast Application, Approval and Funding Times
Bridge loans are known for providing faster application, approval and funding times than traditional loans typically offer. The major disadvantages of these interim loans are their short terms, high-interest rates and larger origination fees. Yet many borrowers accept these drawbacks of bridge loans when they need quick, convenient funding.
If you need to borrow funds quickly and are willing to repay with high-interest charges, you are a good candidate for bridge loan approval. Especially if you are assured of receiving longer-term, low-interest financing in the near future, you will have no problem repaying your bridge loan. A major benefit of bridge loans is that the majority of these short-term loans do not charge repayment penalties to borrowers.
Pros and Cons of Using Bridge Loans
The main pros and cons of choosing to use a bridge loan include the following:
- Fast Cash. Bridge loan capital can be used to make fast or time-sensitive financial transactions.
- Rapid Approval and Funding. Less time is typically required to receive bridge loan approval and funding than financing from traditional loans requires.
- Flexible Repayment Plans. Bridge loans usually provide flexible repayment plans for borrowers, such as interest-only payments and deferred payments until your existing home is sold.
- No-Contingency New Home Purchase. A bridge loan can provide you with the capital that you need to buy your new home even if your current residence has not been sold. This prevents you from having to place the contingency on your new home purchase that your existing home must sell before you buy due to certain financial reasons.
- Two-Home Management. If your current home does not sell before you buy a new one, you may need to manage two mortgage payments at once.
- Traditional Down Payment. The majority of lenders only offer bridge loans to homeowners who have no less than 20 percent of equity in their existing homes.
- Funding Requirements. Some lenders may agree to offer you bridge financing only if you apply for your new home mortgage with them.
- Higher-Interest Rates. Bridge loans typically are issued with higher-interest rates and APR than traditional loans.
Common Bridge Loan Costs
If you secure a bridge loan mortgage, be aware that you will be charged higher interest rates than with a traditional mortgage. Interest rates currently start at the prime rate of 3.25 percent and increase according to the borrower’s creditworthiness.
If you are approved for a traditional loan of $250,000 with a down payment of 20 percent, you will owe monthly payments of approximately $1,150. With a bridge loan, you will be charged an additional two percent interest, increasing your payment each month to $1,380.
Closing costs typically equal two to five percent of the loan amount. In addition, fees that are related to both the mortgage and the property may be included in your closing costs. Remember, also, that these added fees can vary according to the property location and your lender’s requirements.
Common added charges include the loan application fee, appraisal fee, credit report fee and escrow fee. Other commonly included costs are the home inspection charge, the origination fee and the underwriting fee along with the title insurance and title search fees.
When to Apply For a Bridge Loan
Bridge loans are used most frequently by homeowners who wish to purchase a new home before selling their present residences. For these individuals and families, a bridge loan may be the best solution in the following situations:
- You want to buy a new home, but the seller is not willing to accept a contingency offer to sell your existing residence.
- You can only afford the down payment on a new home if you can sell your current home property.
- The closing date for selling your present residence is after the closing date for buying your new home.
- The current real estate market is a seller’s market, which should promote a quick sale for your existing home. You have already located the new home that you want to buy, and you want to move ahead with purchasing it.
The Best Place to Obtain a Bridge Loan
Many lenders offer bridge loans to borrowers today. However, the best source for gaining approval for one of these convenient short-term loans is the provider of your existing mortgage. If bridge financing seems like the ideal solution to your current borrowing needs, contact your current lender for advice and assistance.
Although bridge loans may not be the best solution to all short-term financing needs, they can be the ideal choice in some instances. You may want to buy a new home before your current residence sells. Perhaps you own a sales company that requires fast funding to pay for restocking your popular product inventories.
In these and other situations today, securing a bridge loan may be the very best solution to satisfy your needs. By bridging the financial gap with immediate cash flow, this short-term interim financing can enable you to obtain the essential funding needed.
It is true that you must be prepared to pay higher-interest rates and offer collateral as needed to secure your bridge financing. Yet meeting these requirements can be well worthwhile for obtaining the necessary funding to resolve your current financial needs.