Although a bridge loan can be used in any business to raise operating capital or buy out partners, for our purposes, it is most often funds lent to cover an interval between two transactions, typically the buying of one single-family dwelling and the selling of another. Buyers (individuals or businesses) take out a bridge loan so they can buy another home before they sell an old one. The loan is secured by the houses.
The main benefit of a bridge loan is that it is a way to get financing fast. Like a gap loan, it is useful if you have a seller that is in a hurry for some reason or if a buyer places an offer on a new house with a contingent for selling his or her old house and another buyer comes along and makes an offer on the property, requiring the first buyer to come up with the funds to purchase the property and remove the contingency or lose the opportunity to purchase the home to the new buyer.
In a sellers’ market, some sellers will not accept a contingent offer because they have so many offers, they don’t need to. In a seller’s market or in a auction situation having a bridge loan in place before you offer will make your offer more attractive.
Higher Interest Rates Over a Short Term
The main drawbacks to a bridge loan are interest rates, fees, and the risk of having to maintain a loan on two homes if your old house does not sell quickly. The expense of a bridge loan can be acceptable when you know you can pay it off quickly with a lower interest loan. Even though a bridge loan may carry no payments for a few months, interest will accrue and be due when the loan is paid on the sale of the old property. Fees on a bridge loan typically include:
- Loan administration fee
- Appraisal fee
- Escrow fee
- Title policy fee
- Wiring fees
- Notary fee
- Loan origination fee
A home equity loan is cheaper than a bridge loan, but if your old house, the one with the equity, is on the market, some lenders will not lend on it. The interest rate is lowest for borrowers with excellent credit ratings and lots of equity. The borrower must be able to qualify for owning both houses. Both mortgages are rolled into one for a short time at a high interest rate.
Research Potential Time on the Market
In a seller’s market, buyers are plentiful so the home you are trying to sell might sell quickly unless it is in a totally different market. The answer here is to do plenty of research so you can estimate how long it might take your old home to sell and negotiate that term with the lender with an option for extending the bridge loan. You also want to be aware of any prepayment penalties in the case your property sells quickly.
If the housing market cools and homes are for sale on the market a long time, the number of bridge loans needed may increase to cover this gap between buying new and selling old. If there is a chance your old house will not sell quickly, and depending on your circumstances, it might be safer to wait for the house to sell before you make an offer on a new house or you could be stuck making two home loans.
REI Capital Resources is a loan originator for select investor single-family residential projects. Our goal is to provide fast closing loans to fund your investment projects, so you don’t lose a great deal. This includes bridge loans for the acquisition of property.
Give me a call or send an e-mail for assistance funding your project.
The balance.com What exactly are Bridge Loans by Elizabeth Weintraub, January 2019.
Investopedia, Bridge Loan Definition, by Julia Kagan, April 9, 2019. https://www.investopedia.com/terms/b/bridgeloan.asp
Bridge Loan. https://www.thetruthaboutmortgage.com/bridge-loan/