What is a bridge loan and how will it be useful?
Bridge loans have gained huge popularity in the real estate market. It is basically a type of gap financing arrangement where the borrower can get access to short-term loans in order to meet short-term requirements. There are various factors that can decide whether these bridge loans are a good option for you or not.
It will be best understood by looking at an example, when a house buyer is buying a house before selling the existing house, a lot of buyers are generally use their home equity to borrow from a home equity line of credit for their deposit or down payment but if your closing date of purchased property is before the closing date of your existing house then the common way to find a mortgage to close the deal before closing of their existing house is by financing a bridge loan. A smart buyer always compares the advantages between the two loans in order to determine which is best suited for his/her situation.
How do bridge loans work?
There are various lenders who don’t have set guidelines for Fair Isaac Corporation (FICO), minimums or debt to income ratios. The funding is guided by a make sense underwriting approach. Some of the lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. It means that the borrower is fully qualified to purchase the move up home with the addition of existing loan payment.
The various reasons lenders qualify the buyers on two payments are because of the following:
- The buyer will probably has to close the purchased home before closing the existing house
- Various buyers have an existing 1st mortgage on the present home
- For a short-term period, the buyer will own two homes, generally the home owner already has an agreement in place that confirms return of the loan in a short period of time.
In case the new home mortgage is a conforming loan, lenders will have more leeway in order to accept a large debt to income ratio.
Top 3 advantages of a bridge loan and equity line of credit
- Easy to finance a new condo or home: A bridge loan is actually a bridge between the loan on your existing home or condo which you are selling and the one you are buying. It offers funding for closing a property without a payback of your existing mortgage for a short period of time.
- Gives you the ability to select repayment options: Most of the mortgage companies force the borrowers into long term options. But in case of a bridge loan the borrower gets the choice of repaying before the permanent financing is fully secured. If the borrower repays the loan, then he/she has the option to repay it in full or in a structured payment over a fixed time frame. If you make your payments on time, then your credit rating will improve significantly, making you eligible for a loan that you normally wouldn’t qualify for.
- Time-saving- This type of loan saves you a lot of time because it is designed to generate funds for a new home or condo when the existing property has been sold but not closed. One of the advantages of a bridge loan is that it allows you to use the whole equity from the existing home sale prior to it being realized, as down payment or mortgage for the new home.
In conclusion, the major advantage of the bridge loan is that it allows you to purchase a new home or condo without closing on your existing property.