When you’re ready to buy a new property, but not yet ready to sell your current property, you may be interested in securing a bridge loan. A bridge loan lets you borrow money for the purchase of a new property by using your existing property for collateral. A bridge loan can go by other names as well, such as gap financing or a wrap. But what are the important factors to know when considering a bridge loan? Let’s take a closer look.
Six Tips That Will Help You Better Understand Bridge Loans
- Bridge loans are often processed faster than a conventional loan. While a conventional loan can take up to a few months to process, a bridge loan can be turned around in just a few short weeks.
- Bridge loans are relatively rare, and they have their risks. There is always a chance your current property doesn’t sell before the bridge loan comes to term. You can be granted a deadline extension, but it’s important to be aware that the real estate market can change, and there’s always a possibility it won’t be changing in your favor.
- A bridge loan may be a good option for you if you are looking to flip a property. That’s particularly true if the property needs repair (as is often the case when flipping) and your flip turnaround time is short—under six months to market.
- You’ll need a low debt-to-income ratio to be approved for a bridge loan, as well as a sterling credit score. The lender will qualify you for the potential to own two homes, but not every applicant is approved. Keep in mind that it may be for the best if you don’t qualify, as having two mortgage payments and bridge loan interest can be a huge stressor.
- Bridge loans are intended as a short-term solution, and as a result, costs are often higher. Bridge loans are often only meant to last a few months to a year—far shorter than the average conventional mortgage loan. To generate revenue to compensate for the lack of interest earned, lenders will often charge higher interest rates and fees than home equity loans or conventional loans.
- Bridge loans are a great option if you’re in a seller’s market. If you’re in a buyer’s market, it may not be a great option for you.
When You’re Ready to Buy, Keep Title Insurance in Mind
The financing is in place, and the offer has been accepted. Now’s the time for a title search, to ensure there are no hidden issues with the property title and that you’ll be able to use it the way you want. Keep in mind, it’s your right to choose a title company you know and trust—and you deserve the best. In the end, you’ll be glad you made an educated decision about the title company that is right for you.