Buying a new home by not selling your current one can be hard. However, if you have equity in the home you are selling, a bridge loan can make it easy to buy a new house. The application process for this type of short-term fund can be faster than another type of loan. However, the disadvantage is that bridge funding can be expensive and risky.
So, let us look at the article what is a bridge loan and how it works?
What is Bridge Loan?
Mainly, a bridge loan is a kind of short-term fund that can be used in the transaction of real estate. When a buyer does not have the fund to purchase a new house without the sale of the first one. Therefore, Bridge funding is the financing to purchase a new home without selling the previous one. However, the maximum amount you can borrow with the help of this fund is 80% of the value of your current home and previous home. Moreover, each lender has a different standard. As you read in the above section, “the equity in the home”. So, what is this equity? Equity is the difference between the current value of your home and what you owe.
How Can you Use a Bridge Loan?
Bridge Loan mainly helps you in purchasing your new home. You can use this fund to present an offer without a financing contingency while making an offer to purchase a home. A financing contingency is a contract that allows a buyer to get back money without penalty if the buyer cannot secure financing.
How to Repay The Bridge Loan?
You can repay the Bridge Loan within 12 months or less. Most of the people repay the fund with the money they get from selling their current home. However, there are other repayment options too. Commonly, Bridge funding has a balloon payment system, in which the full amount is due on a certain date. This means you may be able to wait for few months after the close of the bridge fund before you have to start payments.
Bridge Loan and Its Benefits
The application process of Bridge Loan can be extremely quick to arrange as compared to the other forms of funding.
Monthly Repayment Levels
Bridging finance can be paid back on a ‘retained interest’ basis which means the cost is added to the total loan amount. This is quite simpler and more affordable for companies concerned about ongoing cash-flow.
Available for Diverse Situations
While mortgages are only available for the habitable property. However, the bridging fund is applicable for land deals, refurbishment. Also for construction projects where nothing has yet been built.
Less Housing Hassle
You can use a bridge fund to buy a new house without selling an existing home.
How to apply for Bridge Loan?
Firstly, before applying for Bridge Loan, you have to check your financial health. The reason is, that every lender goes through your information to check your creditworthiness. So, for this, you have to check your credit score, monthly sales, and other financial information. After this, go to the next.
So, the next step is to find the best lender for you. As the terms and conditions of Bridge Loan vary from Lender to Lender. So, it is important to choose a lender that fits your needs.
After you get the best lender of your preference, it is time to compile all the documents. You have to gather your financial information, an action plan. Also, in addition to your financial information, you should add your resume to the list.
For example, if you are seeking bridge funding for the property you want. So, if you have flipped dozens of properties successfully, then the lender will more likely to approve your application.
Once you select a lender for your fund, contact your lender to inform you that you understood the procedure. Make sure everything is completed, and provide them with every document they wanted. Talk about all your concerns before going ahead.
However, like everything there two parts to this. The risk of a bridge loan is that if your home does not sell by the time of repayment of your bridge fund, you are still responsible for the debt. So till your old home sells, you will be paying three loans: the two mortgages of the houses and then also the bridge financing. Thus, before you get into one, always check with resources. Bridge Loan might sound interesting, but it is important to understand how it works.