BRIDGE LENDING: STRATEGIC TOOL TO ALLOW PURCHASE BEFORE SELLING
Simply put, a bridge loan uses the value of 2 properties to allow a buyer to borrow money for purchase of a new property before selling the old one. This interim financing strategy can save time and allow for a new purchase with a very low downpayment. The second property used as collateral does not need to be owned by the borrower, as long as the owner of that property allows the property to have the loan secured by the property.
*If you have already found a property to buy and need to act quickly, we encourage you to contact us by phone and/or have your Realtor contact us for a preapproval letter as soon as possible.
Bridge loans can also be used for many other purposes (business cash out, buy a new investment property, pay for business startup expenses, etc)
- Bridge financing is meant to be short term financing, typically in place for only a few months--enough time to purchase the new property, obtain permanent financing on the new home, prep and sell the second property, and pay off the bridge loan. Most bridge loans have a maximum term of 11 months.
- Bridge loan rates are typically anywhere from 8-11%, and upfront fees are typically 2-3% of the loan amount. The reason fees are high is that the bridge lenders make their profit on the initial transaction and are unlikely to collect more than a few months of interest.
- Bridge loans are often cost effective because they allow buyers to avoid expenses which can often total far more than the cost of the bridge financing. Most importantly, they allow the buyer to write a "same as cash" offer which can often increase chances of success in a competitive market.
Bridge loans allow borrowers to:
- Borrow a higher percentage of the new property without liquidating stocks or retirement for a downpayment (avoid capital gains and transaction fees).
- Purchase without having to qualify for the payment on bogh the existing mortgage and the new mortgage at the same time (it's often difficult to qualify to carry multiple mortgages at once).
- Write a "same as cash" offer with a very fast closing timeframe and no loan contingency on the new home
- Write an offer that is not contingent on the sale of the existing house.
- Avoid the hassle and expense of moving twice and paying for interim housing while existing house is being prepped and marketed for sale.
In high cost areas, a few months of storage and temporary housing can easily exceed the upfront cost of bridge financing.
BRIDGE LOANS: WHAT INFORMATION IS REQUIRED FOR PREAPPROVAL
- Borrower must have a property to be used as cross collateral. This could be their existing residence, another property they own, or even a property owned by a friend or family member. This property may need to be appraised, so it's important to be prepared for this if you are planning to use a bridge loan strategy for a new purchase.
- Borrower must have a clear exit strategy in place for repayment of the Bridge Loan. Most clients intend to place a mortgage on the new home once purchased. For this reason, we must preapprove the borrower for replacement financing at the same time we set up the bridge loan.
We will complete a preapproval for this replacement financing, so we may verify to the bridge loan end investor that the client will be capable of paying off the bridge loan when the existing property is sold and/or a new mortgage is obtained.
If the sale of the current home will yield enough to pay off the bridge loan completely, then no other exit strategy is required.