For almost a century the idea of owning a house has been one of the key pillars of the American Dream. For many decades it’s been acting as one of the ultimate goals that everyone aspires to. But one important aspect that nobody tells you about this dream is that there is always going to be another dreamed house, life changes and economic cycles will also influence individuals into aiming for something better.
In the past, if you had a property and you decided to list on the market in order to buy something else, you would have had to wait until the first house was sold before even been able to search for your new home. Take into consideration that this might not be the case if you had the cash to buy the second one without selling first, but for most Americans, it was not the case.
The idea behind a bridge loan is to act as a lending vehicle that will help you borrow the money that you will get from selling your current property and appoint it towards buying your new house. It is a very straightforward type of loan and it typically only acts as a short term borrowing vehicle, allowing individuals to get financed for a period of time that could range between 2 weeks and 3 years.
This borrowing vehicle has become one of the backbones of the entire housing market, allowing individuals to change between properties without the hassle from the past.
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For this specific article we focused solely on real state bridge loans, it is important to mention that this type of borrowing vehicle is also utilized for working capital, equipment acquisitions, and even debt refinancing.
What are the Pros and Cons of Getting a Bridge Loan?
Depending on your situation a Bridge Loan could become your best savior or your worst enemy if not used appropriately. It is key to understand that many individuals get lured by the idea of buying a better house and they actually forgot about the consequences that the wrong structure might have to their finances and their life.
A bridge loan is a great structure, the problematic rises when individuals who were not qualified get their hands in this type of borrowing vehicle. Before even considering a BridgeLoan over any other type of financing, it is important for you to understand what are the pros and cons of borrowing money with this product.
- Freedom of House Hunting: A bridge loan will allow you to search the market with the freedom of knowing that you will be able to make an offer without selling your first property. This might be a great option for anyone who is interested in an x property but knows money won’t be available on time. Choosing a new home is not an easy task, and there is nothing worse than seeing a place that has all the features you are looking for and missing the opportunity simply because of time.
- Short Term Lending: It is great to know that your commitment won’t be for too long, while there are other options that might cover this type of scenarios, in most cases, it would commit you for a longer period of time. Depending on your income, it is not savvy at all to be dealing with two properties at the same time, plus the cost of financing.
- Eliminate the cost of Moving Twice: Moving out can be a complicated and traumatic experience, no only you are living memories in your old house but it is also a real headache once you take into consideration all the preparation and effort it takes. One common practice in the US has been to sell your property, then rent while you find you’re a new house. While this might save you the fees of a bridge loan, it certainly is more expensive down the road. If possible, you should totally consider avoiding the hassle of moving to a temporary place just to move again a couple of months or weeks down the road.
- Stronger Purchase Offer: If you are selling your house one of the worst news you can get is to receive and offer that has a contingency attached to it. This means that while someone is interested in buying your property, their offer depends on their ability to sell an already existing property. For most sellers, this would be considered as a weak offer and someone offering less money than you could easily win any bid. By eliminating the contingency and putting cash in your hand, you would be able to make a hard offer on any property of your interested. It is important to mention that this benefit both the buyer and the seller as the transaction will take place in a much smoother and faster way.
- High-Interest Rates (Fees): This might be the best choice in terms of effectiveness and how smooth the process might be, but it is certainly not cheap… at all!. Before even considering about getting a bridge loan you should understand your finances very well in order to determine if you can afford it. Since it is a short term loan, but a high risk one, most institutions will take advantage by charging obscene fees and extremely high-interest rates for the transactions.
- Overall Debt Increases: You should keep in mind that while the first property acts as collateral while it is sold, this means that overall you are acquiring more debt. It is key for you take into consideration the fact that depending on how long it takes for your first property to be sold, you might end up paying for a mortgage and a bridge loan at the same time. This can be incredibly expensive and if not planned properly, it can put you in a very complicated and bad position both financially but also emotionally.
- Risky Contingency: Unless you have a confirmed and committed buyer that is simply waiting for a credit deposit to expire, the transaction won’t be risk-free. Take into consideration that commitment letters can be broken in certain scenarios, and once again you don’t want to be the one holding to mortgages at the same time.
The best advice I can provide is for you to take your time analyzing your own scenario in order to determine if a bridge loan is even a good idea based on your situation. If you are dealing with a good realtor, they might be able to advise you based on their experience but it is still recommended for you to take some time with a financial advisor before making any decision.
Types of Bridge Loans?
Certain sellers will even offer their own financing services in an effort to incentivize the purchase of their properties. With this structure, they will manage the loan of the property, this will also allow them to ask for a high down payment of at least 50-60% and a balloon payment in most scenarios (a large portion of the outstanding payment would be paid at the end of the loan period).
Keep in mind that this type of model is usually offered as a Bridge Loan and not a mortgage, effectively allowing the lenders to offer their services to individuals that otherwise would not be able to qualify for a mortgage. Just like with any other alternative product, you can expect prices and cost of borrowing to rise considerably higher than with a traditional mortgage.
Depending on your situation and the level of risk that you are willing to acquire by taking one of the other alternatives from this list, you might want to look at more traditional vehicles instead. Take into consideration the fact that most of these transactions could easily be covered by a traditional mortgage instead of taking a bridge loan.
One of the few concerns that rises with this alternative is the fact that the shorter the tenure the higher the monthly payments will be. Having said so, this model allows individuals to hold multiple properties at the same time without having a chip on their back adding pressure. While this sounds like a good option, you still need to understand how expensive your monthly payments would be in a worth case scenario and also if you are in the capacity of sustaining the cost of two properties at the same time.
Blanket loans allow individuals to buy different plots of land or even multiple houses under one single debt structure. This might not be the most common type of bridge loan between retail buyers but it is a common practice from institutions that is making its way into the retail market.
Most individuals who utilize this type of loan are trying to buy a second house but have not sold another one. This acts as a bridge between the time it will take the lender to sell their first property before buying the next one, in synthesis it allows a buffer of time for both transactions to take place under one single structure.
It is fairly common for one side of the transaction to be paid in full once the property was sold and to keep the remaining financing as if it was a traditional mortgage structure.
Hard Money Loans are probably the most common type of bridge loan utilized in the market, and the main reason for this is the simplicity of the transaction. With this type of loan, you would be getting cash in hand for your current property, this would allow you to use your existing property as collateral and for the money received to be used towards the partial or full purchase of your new house.
An important aspect to mention is that this model is only offered for real short term tenures, anywhere between 6 and 12 months. Another important factor to keep in mind is the fact that this type of loan can be incredibly expensive, even if you are only planning on taking the money for a period of under 6 months you would be surprised by how high the fees really are.
Many individuals like this model because applications are pretty straightforward and because overall it is pretty fast to be approved. The fact that the property will act as collateral also covers you in terms of debt, once the property gets sold the loan will automatically get paid and you will be free to go.
Please note that during the tenure of this loan, it is a common practice for lenders to request a monthly payment with the interest rates, amortization and in some cases some sort of premium or fees to cover for the transactionality. Many financial advisors consider this type of loan as one of the riskiest borrowing vehicles in the market. The reason for this is that both the borrower and lender take the risk of not being able to sell the property, in most scenarios where this takes place the borrower will have to deal with two mortgages and high monthly payments. Please take your time to understand the risk before committing to any of these borrowing vehicles.
How to Find the Best Bridge Loan Lender?
Unlike mortgages where you can get providers offering their services to the entire country, bridge loans are usually managed in a more local way. This means that the best place to start searching for the best provider is by reaching out to a real state or mortgage broker in your area.
Most financial institutions of size will not even botter on offering retail bridge loans, the main reason for this is the fact that the entire process requires a lot of moving parts for a loan that will be canceled in a couple of months. Keep in mind that banks and financial institutions are in the business of doing money and they are interested in getting high-interest rate loans but at the longest tenure possible.
By getting a local provider you are gaining advise from a firm that knows the market where you are selling and they can also provide a full service in terms of actually helping you sell your property. At the end of the day, it will be in their best intention and benefit for your property to be sold and for their loans to be paid in full. Most companies do not want to deal with the hassle of having to execute collateral simply because it was not sold and the individual could not afford several properties at the same time.
If possible, it is recommended to stay away from hard money lenders. The main reason for this is that not only they will charge an interest rate and fees that are completely above the market, but they are known for churning their clients. Buying your new house should be a pleasant experience, our advice is to avoid complicating it for yourself and your family.
The housing and real estate market is big enough for you to be able to find the right provider. It is better to take a little bit longer and be able to get in touch with the right firm, than simply doing business with the first option that crosses your way. For most individuals their mortgage might probably the largest debt they may have, it is incredibly important to protect your capital and your heritage in this type of transactions. As mentioned above, you don’t want to jeopardize your own house or your family.
Best Bridge Loans Providers in 2019
1. Hurst Lending & Insurance | Best Residential Option
Hurst Lending & Insurance is a firm that offers a broad range of services and products, one of them being their mortgage division which specializes in residential properties in seven different states.
While it is not their core business, the firm has become known for offering bridge financing alternatives that are tailormade to each client needs. It is important to keep in mind the fact that is rarely seen a company getting so involved in this type of lending instrument, once you analyze the market you can easily see that not many firms are even getting involved in this fairly new sector.
Another important aspect worth mentioning is that this firm offers a really broad range of products that are designed with the intention of helping individuals like freelancers or simply self employeed individuals reach their goals of buying a house or a property.
APR: Rates are based on each state
Loan Amount: $50,000 to $10,000,000
2. Gud Capital | Overall Best Bridge Loan
Gud Capital is a well-known name countrywide, while it is their brand what is usually marketed in reality the firm only acts as an intermediary between borrowers and local lenders interested in offering their services as mortgage brokers and bridge loan providers.
This is an option that provides liquidity and conveniences to a market that truly needs some help. As mentioned before the main problem that many individuals have with bridge loans is the fact that there are not many firms publicly marketing their services in terms of lending nationwide and this makes people rely on their local names.
3. North Coast Financial| Best Option for Californian Real Estate
For almost four decades this firm has been the number one provider of bridge loans in the state of California, offering their services for some of the most important residential projects in the state.
This is a firm that has created a name as the best bridge loan lender in the state by offering fast funding and an easy and transparent process. The main reason why this firm has become so important is the fact that due to state regulations all types of residential loans must have to follow a due diligence process that can take up to 3 weeks. Due to the fact that the firm also offers hard money investment in this type of properties the loans can be approved almost immediately.
If you live in California o you are planning on moving there, you should take NCFS as your best option in the state.
There are literally hundreds if not thousands of scenarios where a Bridge Loan could be the best option for an individual to acquire new real state or even reconstruct an existing one. Individuals should be aware that just like with any type of borrowing vehicle, it has it’s own downside if not utilized properly or simply if the time is not right.
One of the most common uses of bridge loans is for individuals who are trying to flip their houses in order to acquire another property. You should take into consideration that depending on the economic cycle, the housing market or simply your luck, selling a property might take more than expected and you should provision based on that.
On a best-case scenario, you sell your property and you pay for your bridge loan without much hassle, but if things go south you need to know that you are being covered and that you can afford to hold multiple real estate pieces at the same time. This is a game where proper analysis and preparation could become the difference with achieving your property goals or putting yourself in a bad spot financially.
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How much documentation is needed in order to obtain a Bridge Loan ?
If there is any point where bridge loans truly beat other alternatives is in terms of documentation required, specifically income documentations. Due to the fact that BridgeLoans does not have to follow the Repay Rule (Reviews debt to income ratio), it opens a new world that allows individuals who are self-employed, seniors, retirees or even those without income but with equity in their home to become eligible. Traditional banks and even credit unions would otherwise reject any of the individuals mentioned above if there were interested in an Owner-Occupied Loan.
How much can you actually Borrow ?
On average most institutions will allow borrowing up to 80% of the outstanding equity. To put it into perspective a $200,000 mortgage will give you $100,000 in equity, this means that at any given time a bridge loan provider would be willing to lend you up to $80,000 to use as a downpayment for your next purchase. Keep in mind that this may vary depending on state regulations and also providers around the country. Just like with any other borrowing vehicle, it is recommended to review different options before committing to one in particular. Differences in terms of interest rates and fees can be substantial, making it worth the time seeing multiple options.
Is there any credit score limitation?
Unlike with most borrowing vehicles, since you are utilizing the equity of your existing property as collateral, most institutions will be lenient in terms of the required credit score. Having said so, you need to understand that it will depend on the institution you are requesting the loan from and also the amount of equity vs the desired loan. If you are planning on borrowing only 40% of the existing equity, the odds of being approved are considerably higher than if you were borrowing the full 80% of your equity. It is important to mention that while the lender might be willing to take the risk even if your credit score is not completely clean, you might end up having only a bridge loan and not the second mortgage. What I'm trying to say is that the fact that you were approved for a bridge loan does not mean that the firm or any other will be willing you let you get a new mortgage to buy the second house if it is that you need one.
What is the Best Tenure for a Bridge Loan ?
There is not a magic number in terms of length the tenure of a bridge loan should be. Before even taking one it is important to understand very clearly your financial situation, you don't want to find yourself dealing with mortgages for a year! Aspects like the average time to close a deal in your area, pricing and the overall economic cycle should be taken into consideration at the moment of choosing the tenure. Note that most institutions will allow for early repayments without much problem, but choosing a longer tenure might also incur in a higher interest rate since day one.
What are the six / twelve months rule?
These two rules are actually pretty basic and simple, on the synthesis, the rules specify the minimum length that a borrower should live in an x property before getting a bridge loan of it. The main reason behind this restriction is the idea of creating a filter for individuals with multiple properties and those who flip real state for a living. It is important to keep in mind that if you request a bridge loan without living in the house for the minimum period of time required by the lender, you would be considered as a commercial player and not retail. This results in a completely different tax structure and also a different model of fees and interest rates. If you have multiple properties and you don't want to fall into the commercial category, you might want to look for another borrowing alternative.