Before analyzing the importance, we need to know what a “bridge loan” is all about. It is a short-term funding that can help you finance a new, second home buying.
Bridge loan is also known as a gap financing, interim financing, or a swing loan. The tenure of a bridge loan is more or less 6 months and for special cases can extend up to 12 months. Most of the bridge loans have higher interest rate (+2% from the current rate) and high closing cost.
Bridge loan becomes a necessity for the borrowers who want a nice, new home while still having the old one.
A bridge loan works as the “bridge” between the time the new home is purchased and the old one is getting sold.
Now let’s see what kind of challenges borrowers have to face for opting a bridge loan:
1. How can you easily get approved for a bridge loan?
a. You’ll need to have a good amount of equity in your existing home.
b. If you have a strong real estate market in your locality, where sales are rapid and property value increases significantly, your loan application can be approved easily. Good real estate market will help the borrower to sell his old home quite easily. As a result, the risk of financing the mortgage for a new home is low for any lender.
2. How can you find lenders?
a) Not every bank, mortgage lenders, or financial institutions will give you a bridge loan.
b) There are short-term loan lenders who provide bridge loans at low-interest rates.
c) You may check and search online to find such lenders. You may also ask your local bank and local financial institutions.
d) In some special cases, bridge loan lenders also look out for qualified investors who can invest in this type of financing. In return, the investors are getting a calculated a return annually.
3. What will be the credit score?
a. You’ll require high credit score (in the high 600s or above 700) for opting a bridge loan.
b) The lenders also review your past 2/3 years credit history and take the final decision.
c) Lenders won’t approve application from the borrower having bad credit score and late payment history.
4. How do bridge loans work?
a) Lenders mostly appreciate underwriting approach towards financing in bridge loans. There’s no fixed FICO score or lowest debt-to-income ratio requirement.
b) Some lenders also allow conforming loans apart from bridge loan payment.
The lenders may allow the buyer for this process because:
- Most of the borrowers of bridge loan have an existing mortgage on their home.
- Generally, the borrower will close the new home buying before selling the existing home.
- For a short-term period, the borrower will own two homes.
c) If the borrower chooses a conforming loan for a new home, lenders may allow a higher debt-to-income ratio. If they choose jumbo loan for the new mortgage, most of the lenders will restrict the criteria at 50% debt-to-income ratio.
d) A borrower can use the bridge loan proceeds to make payments on his new home. The loan is normally paid from the amount he receives by selling his existing home.
e) Bridge loans do have equity and cash reserve criteria. Few banks may need the contract of sale of your old house from you. They may also need that you keep enough amount in the bank to cover the existing mortgage payments and bridge loan payments for next 6 months at least.
5. What are the risks?
a) Make sure you don’t stretch your income too much to get approved for both the loans. You’ll have to meet all costs required to sell your old home.
b) Don’t gamble in the slow real market if local property values are declining.
c) Due to slow market or for any other reasons, you may need time to sell your old home. If such a situation happens, make sure you have the arrangements for paying off the bridge loan.