What is a Bridge Loan?
Real estate agents, investors, home buyers and home sellers alike should know about this short term real estate loan, or should I say smart home buying strategy. A Bridge or temporary loan is a type of Creative Financing that some Lenders offer.
It is a short term loan, 12 to 18 months only. It gets paid off with longer-term financing down the line or from the sale of a property. It essentially Bridges a Borrower from one point to the next.
- A Bridge loan is deemed cash by Listing Agents.
- Your Buyer does not have to have a contingency of their home selling to use a bridge loan.
- A home owner can buy another house now and sell their home later.
- There is no fear of the buyer finding their dream home because they still have to sell their current home at the same time. This is not required with a bridge loan.
- Your buyer can buy a fixer, fix it up and have their dream home that way.
- This will be a 12 month loan.
- A minimum of 3 months payments are due.
- You have to have at least 20-25% for the down payment on a purchase.
- You have to have decent equity in your existing property on a refinance or pulling cash out.
While there is really no limit on when a bridge loan can be used, as long as the borrower is comfortable with the terms, most bridge loans are typically sought when another sale is pending and the funds are needed to consummate the final deal, permit approvals hold up a project or, most typically, in a “fire sale” situation when a seller must close a deal within a specified period of time.
Some instances of when you might use a Bridge Loan are:
- Pulling some cash out from the equity in your current home and using that money as a down payment to purchase another home. This allows you more time to sell the home you are currently in.
- Buying a house to fix and resell, also known as Flipping.
- Using the Bridge loan to acquire a home that is in disrepair, fixing it up to live in it and then converting the loan to a 30 year fixed rate loan within the 12 to 18 month period.
Rates and costs for Bridge Loans can vary by Lender, of course. Generally speaking however, rates range between 9-12%, interest only.
How We Can Help You:
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I hope this has helped you understand more about what a Bridge loan is.