Bridge Loan Mortgages: Bridging Finance for Real Estate

In this highly competitive housing market we’re currently experiencing, a bridge loan mortgage can help a family during a period of transition. For instance, when a family owns a home, but buys another, a bridge loan helps pay for the new house while they work to sell the old house. 

Imagine you live in one state, but accept a job offer in another state. You need to quickly buy a house near your new place of employment, and that won’t necessarily allow you enough time to sell your current home. Bridge loans are usually short-term financing options that fill in the gap between longer-term funding. Next, we’ll break down the differences between bridge loan mortgages versus traditional mortgages.

Key Differences 

Purpose 

Ideally, home sellers will wait until a new buyer is under contract before putting their own offer on a new house. They use the money from selling their house to buy a new one. But that timing doesn’t always work out, presenting the need for bridging finance. Another reason for taking out a bridge loan is the urgency of home repair costs in an emergency. Meanwhile, traditional mortgages carry the cost of the entire home, and are stretched out over the course of 15 to 30 years. 

Loan Terms

Bridge loan mortgages have much shorter terms than traditional mortgages, typically lasting 6 to 36 months. They are temporary solutions, using the current home as collateral. 

Interest Rates

Because bridge loans come with shorter terms and higher risk for the lenders, bridge loans carry much higher interest rates than do traditional mortgages. Bridge loan rates are usually between 8.5% and 10.5%, whereas traditional, 30-year loans are usually much lower and range between 6% and 7%. 

Qualification Requirements

For both types of loans, creditors will evaluate your credit score. Traditional home loans have credit thresholds around 620, while bridge loans may require higher credit scores. Some lenders may require a 740 score or higher. Another similarity is that each loan is dependent on your debt-to-income ratio or DTI. Traditional mortgages usually have a lower DTI around 40%, while bridge loans’ DTI requirements can be around 50%. Each varies by lender, terms, and qualifications of the borrower. One more requisite for bridge loan mortgages is you’ll likely need at least 20% equity in your current home to take one out. And you can borrow up to 80% of your loan-to-value ratio. For instance, a $150,000 loan on a house valued at $200,000 is 75%. 

Down Payment

Traditional mortgages require 3% to 20% down toward the principal, and carry private mortgage insurance (PMI) until 20% has been hit. Bridge loans regularly require higher down payments, sometimes 20% to 30%. That’s why it’s important to have sufficient equity in your existing property before taking one out. 

Repayment

For traditional financing for real estate, borrowers pay toward the principal and interest at the same time. On bridge loans, borrowers sometimes pay only interest until the end of the term, with a balloon, lump sum payment at the end. That’s why it’s important to have a straightforward exit strategy, like selling your first home to be able to cover the large amount due at the end of the loan term. 

Choose the Loan That’s Right for You

It’s important to know which loan type to choose when considering home financing. If you’re looking for long-term home ownership, a traditional mortgage is likely the best way to go. The 15- or 30-year term breaks interest and principal amounts down to manageable payments. Bridge loan mortgages offer flexibility and quick access to funds in order to bridge the gap between selling one house and buying another. They are for short terms, with higher interest rates, and have special repayment terms. 

Weighing the Pros and Cons

It’s crucial to understand the differences between bridge loans and traditional home mortgage loans. Bridge loans are specially designed to help a homeowner buy a new property before they’ve sold their first house, while traditional mortgages are the conventional way most people use to buy a house. 

The pros of bridge loans are: They provide you funds quickly for a new purchase or fixing an issue with your home, they likely won’t have any payments for a few months, and some have interest-only or even deferred payments. 

The cons are: Much higher interest rates and APR, you need to have enough equity in your home to take out bridging finances, and if for some reason you can’t sell your first home, that could be incredibly stressful. 

Ultimately, bridge loans are a great solution to help people buy a new home before the old one is sold. Contact us at GenWealth Capital Commercial today to discuss our bridge loan options!