Bridge Loans: An Interim Solution
Let’s say you have decided to move to a new neighborhood. You have placed your current home in the market and presently in the final stages of closing the sale with a buyer. You intend to use the proceeds of this sale to purchase your new home.
Then an irresistible offer presents itself. You’ve found your dream home in the new location. Unfortunately the property is hot in the market and if you do not settle down payments now you run the big risk of losing the bid. Your income from your home sale is still due to close by the end of the month. What do you do?
Apply for a Bridge Loan.
A bridge loan is a shortterm financing option while waiting for the realization of a more permanent or next stage financing can be achieved. Bridge loans are usually repaid through conventional financing once the latter is approved and released. Meaning the amount borrowed conventionally covers both the bridge loan amount and the originally required capital.
Just like in the above example individuals or businesses turn to bridge loans in situations such as saving a property from foreclosure taking advantage of a special limitedtime offer or closing a property deal in the shortest possible time.
Because of its convenient nature bridge loans are naturally more expensive than traditional financing. Not only does it require higher interest rates about 1215 points 24 points and other miscellaneous costs administration fees appraisal fees escrow title policy notary fee recording fee wire / courier / drawing fee loan origination fee to name a few it may also require crosscollateralization and a decreased loantovalue.
Based on appraised value LTV ratios generally do not go beyond 65 for commercial properties and not more than 80 for residential properties. On the upside however there is the undeniable factor of speedy processing and lowered documentation requirements.
Where can you avail of bridge loans? Unfortunately not from a bank. From the point of view of a banking institution risks are too great for this type of loan and may encounter complication in dealing with their investors and legal advisers as well. Investment pools individuals and companies who specialize in highinterest loans are source options for bridge loans.
Let’s go back to our example above. When buying a home through the benefits of bridge loans there are some pros and cons that need to be considered. Through bridge loans the homebuyer can place a home in the market right away without limitations.
Since bridge loans may not necessitate monthly payments during the initial months within the term the homebuyer’s cash requirement is eased to focus on the real estate transaction at hand.
On the negative however is the element of higher cost plus the standard requirement of the bridge loan lender that the buyer must possess two homes to qualify. Assuming this requirement is met it is needless to say that mortgage payments for two homes coupled with the accrued interest on bridge loans will be highly stressful. So think before you leap.
About the writer: E. Linares is Chief Visionary Architect at Commercial Magnet:: the new face of the online lending marketplace where borrowers and lenders connect; 6 points of service to help build your wealth! Commercial Magnet is the entrepreneurial platform that takes business owners from start to funding. Find out how a Business Loan or Working Capital can help fuel your business at http://www.commercialmagnet.com.
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