Nowadays, people who want to buy a new property but are unable to sell an existing one to finance the down payment have nothing to worry about. There are two ways that they can obtain the funds and move to a new home. This includes home equity loans and bridging loans. However, bridging loans are becoming more popular today. This is because they bring many benefits for borrowers. However, these loans are different than a home equity line of credit. It is important that buyers know their options before they plan on purchasing a new property.
Bridging Loans Defined
Bridging loans are typically short-term loans. They fill the gap between the new property’s asking price and the owner’s new mortgage in cases when the existing property has not yet sold. Bridge loans provide the funds that buyers may use as upfront payment on the new home.
Bridge loans are great for all sorts of people. Companies that offer these loans cater to individuals who are employed or self-employed, people with or without a good credit rating and companies. They also consider almost all types of real estate. This includes properties that are residential, commercial, semi-commercial and land. These properties may be in excellent condition or require repair and renovation.
Bridge loans can be taken in an open term. This means there is no fixed term contract. Borrowers may also opt for a closed term where there are predetermined completion dates for selling and buying the properties.
Bridging Loans at Work
Bridge loan conditions vary depending on the lender. Some lenders offer bridging loans with the borrower’s current and future home as security. This approach is referred to as peak debt. With this, lenders provide a six to 12 month bridging period for lenders to sell their old property.
Depending on the lender and borrower agreement, repayment may be required during the bridging period. Some lenders may collect this in cash to avoid interest accrual every month while others prefer to place it on top of the total loan amount. When the old property is sold, the proceeds go directly to pay the peak debt. Borrowers will pay the balance in the same way as paying a regular mortgage. The new property becomes the security.
Other lenders offer homeowners a second loan to purchase the new property. This means they have to pay interest and fees for two loans. The first loan is for the new home and the other is for the current home mortgage. The bridging period in this approach is typically 12 months. Borrowers have to make repayments on two loans during this time. The existing mortgage gets settled first if the current home is sold. The remaining proceeds will be subtracted from the new loan, and the balance is paid as a new mortgage.
Interest Rates and Fees
Interest rates and fees differ with every lender. However, bridge loan interest rates are often high. There are many reasons why lenders offer these loans with high interest rates. Primarily, it is because these loans are short-term financing options, and lenders only have a short amount of time to generate profit. With this, they derive profit from the interest rates. In addition, the potential risks that come with these loans also affect their interest rates.
Fees commonly charged in bridge loans include the administration fee, escrow fee, appraisal fee, notary fee, title policy, recording fee and wire, drawing and courier fee.
The Pros and Cons of Bridge Loans
Bridge loans can turn out to be a good or bad solution for homeowners. With this, it is important that they weigh their options carefully before they come up with a final decision. There are a lot of bridge loan lenders out there. The best way to find a quality lender is to shop around, compare and understand the terms before committing.
• Bridge loans allow homeowners to make use of the proceeds from their old property to be used as a down payment on their new home.
• Bridge loans are the fastest and the most convenient way to obtain funds for the move-up home.
• Lenders may allow borrowers to convert bridge loans into a new mortgage at a later date.
• Bridge loan lenders do not have set qualifications or guidelines like regular mortgage providers. The underwriter grants the loan based on his or her own judgment.
• Bridge loans are more expensive than home equity loans.
• Borrowers will have to pay two mortgages.
• There are a number of fees when applying for bridge loans.
Securing a Bridging Loan
Obtaining a bridge loan can be a daunting process. This is because there are many lenders available, and they have varying requirements. In addition, applying for these loans is a big decision. There are some things that borrowers can do in order to secure their bridging loans in a fast, easy and secure way.
• Get to know the lender.
Borrowers should know their potential lenders well. They should clearly understand the type of loans offered, the security preferred and their terms.
• Prepare a single page document.
Borrowers should come up with a one-page document that shows a brief summary of the deal in a legible and organized manner. It should include details about the security, reasons for the loan and the exit route. All information in the document should be accurate. With this, the borrower leaves the underwriter with the impression that they have planned everything well and are willing to repay.
• Estimate the property’s value accurately.
Inaccurately estimating the property’s value can cause serious delays in the bridge loan application process. The lenders may lose confidence in the borrower.
• Keep up with the lender’s requests for additional information.
To avoid delay and possible application rejection, borrowers should provide the underwriter’s request for additional information. Otherwise, underwriters will think that borrowers do not prioritize the transaction.
• Be patient and polite.
Complying with all the requirements that underwriters need can be tedious. With this, borrowers can lose patience and become rude to the underwriters. This should be avoided so that the transaction can be processed quickly and smoothly.