Alternatives To Bridge Loans
Before you take out a bridge loan, its best to consider alternatives such as:
- Home equity line of credit . This product is a line of credit based on a percentage of the equity in your home. If approved, you can borrow as much as you need up to your credit lines limit, so you could potentially borrow enough to make a down payment on your new home and pay off the credit line when you sell your home. Like a bridge loan, this alternative uses your home as collateral.
- Home equity loan. With this alternative, you borrow against a percentage of your homes equity as a lump sum. If you use a home equity loan as a down payment on a new home, youll need to start repaying the loan right away. Your current home secures the mortgage.
- Cash-out refinance. To use a cash-out refinance as an alternative to a bridge loan, you would refinance the mortgage on your current home for enough to pay off your mortgage and make a down payment on a new home. You would need enough equity in your current home to make the transaction work, and youd still have two mortgages until your current home sells.
- 80-10-10 piggyback loan. With this option, instead of taking out a home equity loan or line of credit on your current home, you take one out on the new home to cover 10% of the down payment. Typically, you take it out at the same time as the mortgage on your new home. You also contribute 10% of the down payment. Youll still need to pay the mortgage on your current home until it sells.
Take Your Time To Make A Decision
Whether you opt for a bridge loan or one of the suggested alternatives, it’s important to take your time before pulling the trigger on any of them. Check your credit score to see where you stand and what you can reasonably qualify for, then run the numbers on each for your specific situation to determine which one is the best option for you.
Do I Qualify For A Bridge Loan
You need to have excellent credit in order to qualify for a bridge loan and requirements will vary with different lenders. Generally speaking, youll need that 20 percent equity in your home and a low debt-to-income ratio.
If you dont have enough equity, cash, or your credit has some negative marks, you most likely wont qualify for a bridge loan.
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Disadvantages Of A Bridge Loan
Bridge loans can be expensive they are usually more expensive than a HELOC or home equity loan. They can also be risky because youre banking on the fact that your home will sell quickly. Lets not forget the added financial stress of having two homesand two mortgages, even if its temporary.
Bridge loans may have higher interest rates, APR, and your lender may use a variable prime rate that increases over time. Theres also the accrued interest you need to pay in a lump sum once your house sells. So, if it takes six months to sell, youll need to pay six months worth of accrued interest, in addition to closing costs and fees.
Home Equity Loan Or Heloc
Home equity loan and HELOC interest rates and fees may be lower than bridge loans. A home loan gives you the money upfront while a HELOC is more like a credit card you use only what you need.
Just like a bridge loan, however, both loans require you to use your home as collateral. Also, if time is of the essence, a home equity loan may not be the best option since it typically takes anywhere from 2-4 weeks to process.
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Documents Required For Bridge Loan
Here are the documents that you must keep handy whilst applying for a bridge loan.
A valid photo identity proof
A valid proof of address
Your recent salary slips and/or income statements
Your recent bank statements
The documents substantiating the clean title of the property you seek to use as collateral
The details of the property you wish to purchase .
Bridge financing is an excellent way to fulfil the chasm between your short-term availability of funds and your long-term goals. You can easily apply for a bridge loan in India at feasible interest rates.
Where To Find Bridge Loan Lenders
Bridge loans are a specialized product, and not all lenders offer them. Ask the lender youre working with for the new home purchase about whether it offers bridge loans. If it doesnt consider these options:
- Local banks and credit unions. If you already bank with a local institution, ask about bridge loans. Even if you dont, local banks and credit unions offer personal service and understand your local real estate market.
- Non-QM lenders. Non-qualified mortgage lenders specialize in alternative mortgage products like bridge loans. Non-QM mortgages have features that arent allowed in qualified mortgages, like interest-only and balloon payment structures.
- Hard money lenders. Hard money lenders are individuals or groups of investors who offer loans with short repayment terms, like bridge loans. They tend to have higher interest rates, but they may not be as stringent when it comes to credit requirements. Confirm theyre reputable before working with one.
Verify that any loan officer or institution youre considering is appropriately licensed by visiting the Nationwide Multistate Licensing System Consumer Access website. You can search by loan officer or company name and confirm theyre licensed in your state.
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How Do You Repay A Bridge Loan
Bridge loans typically must be repaid within 12 months or less. Most people pay off their bridge loan with money from the sale of their current home, but there are other repayment options. Bridge loans may be structured in a number of different ways but commonly have a balloon payment at the end where the full amount is due by a certain date.
You may be able to wait a few months after the close of the bridge loan before you have to start making payments, though this will depend on the particular loan you have been approved for.
Applications In Financial Modeling
In financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company’s financial performance. Overview of what is financial modeling, how & why to build a model., it may be necessary to build in the functionality for the model to have a bridge loan that kicks in if the company runs out of cash.
In many types of financial modelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M& A model, LBO model, budget model. Discover the top 10 types, there will be a revolver built it, but a more substantial piece of short-term debt may be required if the company looks like it will have a negative cash balance. In this case, the analyst will add a short-term debt tranche to the debt scheduleDebt ScheduleA debt schedule lays out all of the debt a business has in a schedule based on its maturity and interest rate. In financial modeling, interest expense flows as well as on the balance sheet under short-term debt.
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To learn more, launch our financial modeling coursesFinancial Modeling CoursesBrowse all financial modeling courses from Corporate Finance Institute, and learn online important financial concepts required to be a financial analyst.!
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Potential Advantages Of Bridge Loans
- Can help you buy a house before yours sells
- Can provide peace of mind and flexibility by giving you additional time to sell your existing home
- Allows you to use the equity in your current home for a down payment on your new home
- Can give you the funds and time to make upgrades to your new home before youâre living there
Remember These Golden Tips
- Get a proper valuation of your existing property and be realistic about how much you can sell it for.
- Its recommended that you have at least 50% in equity in your existing property to avoid having to pay a large interest bill.
- Be realistic in how long it will take you to sell your property. What is the market like where you live? Also, take into account the time it takes to reach settlement .
- Its recommended that you make some repayments during the bridging period in order to minimise the interest and overall peak debt.
- Can you temporarily move back home or stay at a friends house, rent-free? You should consider placing short-term tenants in your existing property to help keep your interest costs covered while youre trying to sell.
- You should compare your financial position very carefully, consider the costs, and decide if youll be better off using a bridging loan. E.g. if your peak debt is greater than 80% LVR then it may be too high so you should consider selling first then buying afterwards instead of a bridging loan.
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What Is Bridge Financing
- Bridge financing is a loan used to purchase a new home before selling your current one.
- The borrower does not need to pay off the loan until their previous home has sold.
- Typically, borrowers must pay off the loan within 6-36 months.
- They can provide a seller with extra time to wait for a better offer.
- Although a HELOC is a cheaper alternative, borrowers will need to make monthly payments while waiting to sell their previous home.
Bridge financing is a type of short-term financing that helps you secure adown paymenton a new home by using your current homes equity. If you are planning on selling your current home after you purchase a new home, you may need to use a bridge loan until you receive the money from the sale. Bridge financing is only used when you have the home equity to repay it in a short period . With this, you can secure a new home whenever it is most convenient without having to worry about having to sell your current home quickly.
Bridge financing is different from a home equity line of credit because HELOC borrowers must make monthly interest payments. Borrowers of a bridge financing loan only need to pay when their previous property sells. As a result, bridge financing is a better option for those strapped for cash.
How A Bridge Loan Works
Also known as interim financing, gap financing, or swing loans, bridge loans bridge the gap during times when financing is needed but not yet available. Both corporations and individuals use bridge loans and lenders can customize these loans for many different situations.
Bridge loans can help homeowners purchase a new home while they wait for their current home to sell. Borrowers use the equity in their current home for the down payment on the purchase of a new home. This happens while they wait for their current home to sell. This gives the homeowner some extra time and, therefore, some peace of mind while they wait.
These loans normally come at a higher interest rate than other credit facilities such as a home equity line of credit . And people who still haven’t paid off their mortgage end up having to make two paymentsone for the bridge loan and for the mortgage until the old home is sold.
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What You Need To Know About Getting A Bridge Loan
Many borrowers have heard of bridge loans but they arent exactly sure how they work, how to get a bridge loan or how to qualify for one. This article will focus on residential, owner-occupied bridge loans as opposed to bridge loans for business purpose.
Bridge loans are a fast and easy option for equity-rich property owners who are currently illiquid and need cash. The bridge loan allows the borrower to raise funds by taking out a loan against their current property. The bridge loan proceeds can then be used to purchase a new property. Once the new property is secured, the previous property is then sold which pays off the bridge loan.
About Our Bridge Loans
A bridge loan is a short-term loan used to bridge the gap between the purchase price of a new home and the buyers new mortgage if the home has not yet been sold. The existing home will be used as collateral for the bridge loan. The bridge loan funds are then used to make a down payment on a new home.
How do Bridge Loans Work?
Many lenders do not have set minimum credit score or debt-to-income ratio guidelines. A what makes sense underwriting approach guides the funding process. The long-term financing for the new home will be the puzzle piece that will necessitate strict underwriting guidelines.
Some conforming loan lenders exclude the bridge loan payment from qualification. This means that the borrower is qualified to buy the new home by combining the existing loan payment on the buyers existing home, if any, with the new mortgage payment on the move-up home. Many lenders qualify the buyer for two payments for the following reasons:
- The majority of buyers have an existing mortgage on their current home.
- The buyer will most likely close on the new home before selling the current one.
- For a limited time, the buyer will own two homes.
What Documentation Will Be Required to Apply?
- 4+ months in business
- 10k+ in monthly revenue
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When To Get A Bridge Loan
Lets say you need to move to another area for work. You already own a home but youd like to purchase a new home in the new city.
In some markets, a home sale can take months, particularly if you dont want to drop your price. This creates a challenge if you want to buy quickly in the new city but need to use the equity from your old home.
Heres an example of how the process might work.
You expect to sell your old home for $400,000. You have $150,000 in equity, meaning you still owe $250,000.
In most cases, youll need at least 20% equity in your home to qualify. In this example, with 37.5%, you have enough equity.
With a bridge loan, you may qualify for up to 80% of your homes value. In this case, thats $320,000. You owe $250,000.
Closing costs for the bridge loan might run another $6,000. After paying off the original mortgage, the bridge loan gives you about $64,000 you can use as a down payment.
A Different Route: Alternatives To A Bridge Loan
A bridge loan isnt the only option when you need help with cash flow or covering a temporary gap in your finances. Have a mortgage lender walk you through the various loan products, detailing how much youll qualify for and how theyll work in the context of your financial situation.
Here are some options to consider:
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Why Would You Ever Need One
The main purpose of a bridging loan is to bridge the finance gap so you can buy your new property before you find a buyer for your property. Ideally, youll want to sell your property first before buying a new property but sometimes you need to act fast to buy and you cant wait 2,3 or even 6 months for your home to be sold.
This is not so much an issue in most capital cities where it doesnt take long for properties to be snapped up. Bridging loans are more beneficial in suburbs/locations where properties tend to stay on the market for longer and are more difficult to sell.
You should find out what clearance rates are like in your area to get a better idea of how long itll likely take to sell your property. Alternatively, speak to a mortgage broker about your property purchase plans.
In the real world, a vendor isnt going to wait for you to sell your property. Theyll simply sell to someone whos ready to buy so without the ability to move quickly, your dream property can easily slip through your fingers.
If you set a realistic time frame to sell your property with a realistic price estimate based on a proper valuation, bridging finance can give you time to sell your existing property rather than having to rush and possibly missing out on getting a better price.
When A Bridge Loan Makes Sense For Buying A New Home
A bridge loan may make sense if you need to get into a new home right away and cannot wait to sell your existing home. This might happen if:
- You are relocating for work and need to move right away, so you dont have time for your existing house to sell before getting a new house.
- You dont want to move into a temporary home after selling your current homewhich could happen if you sell without having already purchased a new one.
- You want to make a non-contingent offer that doesnt depend on you first securing a new mortgage loan on a new homebut you dont have the cash do it.
Say you own a home valued at $150,000 with a remaining $75,000 mortgage balance. If you qualify for a bridge loan equal to 80% of your current homes value, you could borrow a total loan amount of $120,000.
You could use that to pay off the current mortgage loan balance and put the remaining $45,000 toward your new homes down payment and closing costs. You could move into the new home before selling your old one. When you do sell, youd pay off the $150,000 bridge loan in full.
Unfortunately, theres a risk that your current house wont sellin which case youd be responsible for repaying the bridge loan as well as the home loan on your new house.
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