Selling and buying a residence can be a complicated process. Occasionally, a homeowner may be unable to put money down on a second property until the sale of their first home is complete. To finance the down payment on their new property, homeowners can work with their current mortgage lender to obtain a six- to 12-month loan to “bridge the gap” between the purchase of the new home and the sale of the old one.
Bridge financing is a temporary financing option available to homeowners until they successfully sell their current residence. The high-interest rates (typically 9.875 and 11%) and short-term nature of bridge loans make them ideal for those expecting a quick sale of their existing house.
Once the homeowner sells their primary residence, they can utilize the proceeds to repay the bridge loan, leaving them with only the mortgage on their new house. If, however, the borrower’s home does not sell during the brief loan period, they will be responsible for payments on their first mortgage, their new home loan and the bridge loan.
Bridge financing is not available to everyone. To begin with, the homeowner must have a substantial amount of equity in their current house to qualify. Because in many cases they can borrow up to the full amount for the new home, the math works only if the current home has this equity.
Additionally, the lender will look at the debt-to-income ratio, which is the amount of money the homeowner must spend each month, considering previous debts such as their present mortgage in relation to their income. It demonstrates to lenders that the homeowner is not taking on more debt than they can manage. Without a reasonable debt-to-income ratio, qualifying for a bridge loan can be difficult, considering the expense of two mortgages.
Finally, these loans are often only available to those with excellent credit histories and credit scores. While lenders’ minimum credit scores may vary, the higher the credit score, the lower the interest rate, and the more likely the chance to qualify for it at all.
The main advantage of bridge financing is flexibility. It gives homeowners short-term financing to fulfill current expenses and close on the new house swiftly. Furthermore, most bridge loans are non-recourse, which means the lender can only collect on the obligation by selling the property.
Flexibility comes at a cost, as bridge loans have a higher interest rate than permanent financing from a typical lender. Payments are often more significant than those for permanent financing due to the shorter loan periods. Due to the loan’s brief duration, lenders often charge higher fee’s but can be less rigid concerning late payments.. They are charging higher fees and penalties to compensate for this flexibility.
Homeowners also need to consider the additional fees, including facility or arrangement fees, legal fees, valuation fees, administration, exit and broker fees. To avoid any broker fee’s. Homeowners can go directly to a nationwide direct bridge lender..
Along with being more expensive, bridge loan repayment relies on selling the first home, which may not happen in the time required. If the house is unsold within the loan period, the homeowner cannot convert their loan to permanent debt and, in extreme cases, defaults.
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