What is a Bridge Loan?

If you’re planning on selling your home and moving to a new home, finding the cash flow to make that move can be difficult. With bridge loans, you can get the funding you need to purchase your new home before you sell your existing home.

So, how do bridge loans work? Is a bridge loan right for you? We’re here to help you understand. Let’s take a closer look at bridge lending so you can determine if a bridge loan is the solution to your financial obstacles.

• What is a Bridge Loan?
• How Do Bridge Loans Work?
• Advantages of Bridge Lending
• Bridge Loan Risks & Considerations
• Who Should Consider a Bridge Loan?
• Bridge Loan Requirements
• How to Apply for a Bridge Loan
• Secure Real Estate Funding with Ease

What is a Bridge Loan?

A bridge loan is a loan that’s designed to bridge the gap between two loans during a transitional period. Let’s say you’re selling your existing home and buying a new home in another city. You can sell your existing home and use that money to finance your new home purchase, but what if you can’t sell your home before you move?

With bridge lending, you can take out a temporary loan — usually between six months and a year — to finance your new home purchase before you sell.

How Do Bridge Loans Work?

You may have heard of bridge loans, but how does a bridge loan work?

Bridge lending is a relatively straightforward concept. If you need help purchasing a new home before you can secure permanent financing, you can take out a bridge loan before you sell your home or purchase your new home. Unlike other loan programs, bridge loans are specifically designed to bridge the gap between two long-term real estate loans.

Homeowners typically wait until they’ve accepted an offer on the home they’re selling to purchase a new home, but that’s not always an option. If you’re starting a new job or need to move quickly for other reasons, a bridge loan can help you purchase a new home before your existing home is under contract.

A bridge loan by definition is considered a specialty loan — and these loans should be paid off within a few years.

Advantages of Bridge Lending

Immediate Access to Cash

People choose bridge lending for the same reason they choose hard money loans — quick access to cash. When you get approved for a bridge loan, you can receive your funds in just a few weeks. Not only does this eliminate the stress of waiting to buy a home, but it also gives you the freedom to jump on any lucrative real estate opportunities you discover before those properties sell.

Keep in mind that the time it takes to fund your loan will vary depending on the lender you choose.

Flexibility

Bridge loans offer flexible terms, so you can usually find something that works for your financial situation. You don’t have to borrow more than you need, so you can keep your total debt low and make it easier to repay your loan.

While bridge loans do offer some flexibility in terms of what you can use them for, they’re typically used to purchase a new home before selling your existing home. That being said, you can technically use a bridge loan to build a home — similar to a hard money construction loan.

Bridge Loan Risks & Considerations

Higher Interest Rates & Costs

When you take out a bridge loan, you can expect to pay higher interest rates and associated costs than you would with a traditional loan. Ideally, you want to wait until your old home is under contract before moving and buying a new home. If you can’t sell your home and decide to take out a bridge loan, expect higher loan costs.

Short Repayment Period

Unlike other types of loans, bridge loans are specifically designed to be short-term loans with short repayment periods. Bridge loans usually last between six months and a year, and you have to repay your bridge loan within 12 months in most cases.

If you decide to take out a bridge loan, make sure you have the means to repay it in a short time.

Who Should Consider a Bridge Loan?

If you’re moving soon and you haven’t sold your existing home, you can take out a bridge loan to finance your new home purchase. While traditional mortgages are a better alternative to bridge loans if you can wait to move until after accepting an offer, bridge loans can give you access to the money you need to buy a home.

Homebuyers in competitive markets benefit more from bridge loans. Quick access to cash flow means you can take advantage of lucrative real estate opportunities as soon as you spot them, making it easier to find a great deal on your dream home.

Real estate investors can also use bridge loans to finance real estate investments. If you’re investing in rental property, you can also consider taking out a hard money loan for rental properties.

Bridge Loan Requirements

Before you apply for a bridge loan, take some time to weigh your options and make sure you qualify. Bridge loan requirements are fairly simple, but there are a few things you need to have to get approved:

• Collateral: Bridge loans need to be backed by collateral in many cases — typically real estate or business inventory. If you don’t have collateral, your loan may be denied.
• Equity: You need to have at least 20% equity in your home to get approved according to most bridge lenders. If you don’t have 20% equity, you may have to wait to take out a loan.
• Debt-to-Income ratio (DTI): Like any loan, lenders look at your debt-to-income ratio to make sure you’re not taking on too much debt to repay your bridge loan.
• Credit score: Your credit score is also a factor when it comes to bridge loans — although exact credit score requirements vary by lender.
• Exit strategy: Lenders want you to have an exit strategy to repay your loan, which may include selling your primary property or other investments.
• Proof of income: Providing proof of income shows lenders you can afford to repay your loan if something unexpected happens. Again, exact requirements vary by lender and the amount you’re trying to borrow.

How to Apply for a Bridge Loan

Preparation

Before you apply for a bridge loan, take some time to lay out a detailed plan and gather any financial records and property details you might need to complete your application. You should have a clear exit strategy and a good understanding of bridge lending before you apply for a loan. You also need to have a plan for securing long-term financing for your new home or investment property.

Finding a Lender

Whether you’re looking for a bridge lender or a hard money broker, do your research and look for top lenders. Some banks and lenders specialize in short-term loans — and some are even known for offering bridge loans with competitive rates.

You can also reach out to a few lenders to learn more about loan terms and interest rates before you apply. The more time you spend researching, the more likely you are to get a favorable loan.

Application Process

Once you decide on a lender, you can start filling out your application. Make sure you provide any required supporting documents with your application. Your lender will also check your credit and appraise your property as part of the application process.

From the time you submit your application, it can take anywhere from a few days to a few weeks to receive funds.

Loan Underwriting

If your loan application is approved, you’ll move on to the underwriting stage. Your lender will take a closer look at your application to assess risks and finalize your loan terms. If you have any questions about your loan, you can ask them during this time.

Closing

When the loan underwriting process is complete, it’s time to close your loan by double-checking everything and signing the loan documents. You may also need to pay fees at this time.

Secure Real Estate Funding with Ease

Whether you’re a homeowner on the move or a real estate investor, bridge loans are one of many resources you have at your disposal. Bridge lending is especially beneficial if you want to purchase a new home before you sell your existing home and move.

While bridge loans are right for some people, they’re not for everyone. You might consider taking out a hard money real estate loan instead. At Source Capital, we specialize in hard money loans. You can get a free, no-obligation quote in a few short minutes. Apply now or contact us to find out how a hard money real estate loan can help you.