There are a variety of factors to consider when it comes to obtaining bridge loans. Find out how you can make an informed decision regarding bridge lenders.
Bridge loans have become popular. If you decide to purchase a new residence before selling your present house, there are options of getting funds for down payment. You can obtain financing through the bridge lender or home equity loan (line of credit). The equity mortgage may be less expensive but it does not have the benefits that borrowers look forward to. Besides, lending companies do not normally approve home equity if the property is on the market. These are provisional loans that fill in the difference between the sales price of a new abode and home buyer’s new mortgage. The bridge loan is secured by the buyer’s present domicile. Bridge funds are used as deposit for the move-up unit.
Many lending facilities lack guidelines for FICO minimum requirements or debt to income proportions. Instead, the subsidy is guided by a practical underwriting approach. A number of lenders do not include bridge loan payments for eligibility or qualification. In other words, the borrower is eligible to purchase the move-up property by adding any loan payment that has been made on the buyer’s current property to the new mortgage payment for the move-up residence.
Lenders qualify the buyer based on the following grounds:
- Majority of buyers own a current first mortgage on a present dwelling.
- The buyer will most probably secure the move-up home acquisition prior to disposing of the present house.
- The buyer owns two homes until the other one has been sold.
According to HomeBuying.com, “if the new home mortgage is a conforming loan, lenders have more leeway to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50 percent debt-to-income ratio.”
Finding a Lender
How do you discover the competent and responsible bridge lender? To start with, here are the steps that you should follow:
- Decide on the amount that you need to bridge the variance between selling your present house and buying the new property. The duration of short-term bridge loans are set by lenders.
- Find the bank or mortgage broker who can help you best regarding this concern. Fees are not all the same for lenders. This is one major consideration but focus more on the charges since this is where you pay the percentage.
- Your assets must be appraised. Borrowers will only be entitled to bridge loans after their assets are valued and deemed acceptable as collateral. In case you have an existing contract, get in touch with the appraiser of your buyer for a discounted copy of the
- It is important to prove that you have the capacity to comply with monthly payments on time. Bridge loans are always based on the assets for collateral and on your ability to repay the bridge promptly.
- Mull over other financing options that may be more manageable for you like the home equity loan. The key is careful planning and prudence so you will be cost-effective.
- Look at the time frames. Envisage a reasonable concluding date once an offer is accepted for a new property. In the event the seller does not have qualified offer for the property on sale, the scheduled closing date on the new estate is more important. This could have a bearing needed for a bridge loan to allow the seller to terminate the sale in connection with the new purchase.
- Find out the amount you need to close the new property which is the cost needed as the bridge.
- Make sure that the lenders offer bridge loans since they may only have quick-fix financing at reasonable terms. Local commercial banks and credit unions may grant bridge loans as form of accommodation only to regular customers. Even if the facility does not have this type of financing, it is possible for them to oblige to loyal clients waiting for a closing on their current abodes.
- Read, understand and analyze the terms and conditions of your contract with the bridge lender. Try to compare these provisions to those offered by cooperatives and banks. Borrowers of bridge loans need to cope with three loans for a short duration so the least costly should be the priority.
- The world-wide web is usually the best place for finding bridge lenders. The so-called “hard money” lending firms have this kind of financing in their portfolios.
Risk and Reward Considerations
With the first type of bridge loan, you are mandated to settle the monthly mortgage payment on your new estate. The moment your old home is sold, use the earnings to pay off the accrued interest together with your remaining balance on the bridge.
The second program is deemed as more of a risk: You are allowed to keep your current mortgage. Nevertheless, borrow against the equity in your current home and use the funds as down payment for the home to be purchased. For example, the new house is worth $500,000. Then, you already have $175,000 in equity for the present dwelling place. Let us say it is worth $300,000 with unpaid mortgage balance of $125,000. You prefer to give a deposit of $100,000 on your new acquisition. Now, you have allocated $50,000 as savings to defray a portion of the cost. The bridge loan allows $175,000 in terms of equity so it becomes manageable for the borrower.
There are three loans to take care of and these are as follows:
- Mortgage on your old home
- Mortgage on your new home
- Bridge loan
Of course, you are not forced to deal with three loan payments on a monthly basis. In its place, you settle the unresolved balance and accumulated interest when you sell your present real property. As such, not all people can afford to take on two mortgage payments every month even if these will only last for a brief duration. If this will only stretch your resources and cause hardships, it is evident that your bridge loan will not be approved.
WSJ.com mentions that “Bridge loans are a sensible means of financing as long as the homeowner is able to afford the loan payments, and as long as the new home is not used as collateral to acquire the loan, says Robert de Heer, author of Realty Bluebook, which covers real-estate financing. Only the current home should be used as collateral. Like most hybrid mortgages, terms and conditions vary from lender to lender. Some will loan you a percentage of the value of your existing home, minus the outstanding mortgage balance, while others will only let you borrow a percentage of the equity in your current home. Interest rates on bridge loans run about two percentage points higher than the average 30-year fixed-rate mortgage, which currently stands at about 6%, according to HSH Associates, a mortgage-information provider in Butler, N.J. (If your home sells before the specified six-month period, you usually don’t have to pay interest for the remaining period.) As with mortgages and home-equity loans, interest payments on bridge loans are tax-deductible.”
It is a probability that you will obtain the best deal only by searching for a bridge lender who will answer for your bridge loan and new mortgage. Reasonable lenders will give you a very affordable rate on a provisional bridge loan if they can also lend the long-term finances for your new home.
See to it that you check out the costs and fee schedules cautiously. Keep in mind that there may be a higher level of risk associated with bridge loans. Lending facilities frequently charge higher fees to a large extent. Moreover, it is not unusual for lenders to impose a minimum of percentage point of the outstanding loan balance. Study the prepayment penalties imposed by the lender with care.
Most Favorable Conditions
The loans have been designed as short-term loans. These should be paid back within ½ year or after your original home has been bought by your client. The rule is whatever comes first. In many states or cities (counties), conditions are optimal for obtaining a bridge loan. Homes sell but not as fast just like in the past. Prices are more realistic. When the housing sector is on an uptrend, homeowners will find it easy to sell a home within a maximum of two months. This is if the price is right based on the National Association of Realtors. When demand for housing decreases, the home may be on the market for six months up to one year if the selling price is too stiff. Make sure you’ll be able to renegotiate to extend the loan period if your house fails to sell before the loan comes due. Before you opt for a bridge loan, consult your local realtor to see how long homes in your area and price ranges are on the real estate market. Think about bringing down the price if the house is not drawing the interests of potential buyers. It is the only way of disposing of your home promptly.