What is a Bridge Loan and Why is it Beneficial?

A bridge loan might be just the think you need to take your dreams of homeownership and turn them into reality, or to purchase a new, larger or upgraded home. Read on to learn the “ins and outs” of these loans, their pros, and cons and how they can help you.

When it comes time to making an educated and informed financial decision about obtaining a loan to by a home or to help you sell your home and buy a new one without too much financial burden, it’s time to learn about how a bridge loan can help. Let’s start by explaining what it is. This is a specialized short-term loan that “bridges the gap” between the time you sell your home to buying your new one. It is very useful when it comes to real estate transactions, as you can apply any equity in your current home as well as the loan itself, toward a down payment on a new home even before your current home is sold. Once sold, you pay back the loan with the funds earned from the sale of the first home.

These loans allow homeowners to not lose out on their new dream house because they have to wait until their current home sells to afford a down payment. It’s also nice to already be out of the current home while your Realtor is selling your home so you don’t have to worry about daily cleanings, leaving the house on show notice due to showings or having the home look “perfect” while also trying to live in it (parents may relate to this benefit…).

Another benefit is that a bridge loan is typically not difficult to apply for or obtain. Because borrowers accept a high debt to income ratio (due to the fact that they own two homes in this time period), debt and credit scores are not scrutinized as they might be with a traditional loan. There is also markedly little paperwork involved in obtaining this type of loan. But keep in mind that you will have to apply for two mortgages during this bridge period as well, so credit score is still important to keep on the up and up.

What you should know before applying for this type of loan.

There are some risks associated with this loan and you should be abreast of the terms prior to signing any official documentation. Downsides include high interest rates. Because the lender is taking a “risk” in extending you the funding for this loan, based on the sale of your current home, as well as the short-term nature of this loan, interest rates are higher. It could even reach 10% or higher. However, some lenders will allow you to skip up to four months of payment on the loan, meaning you could in fact avoid interest rates if you are able to sell your current home and pay off the bridge loan before payments come up. You should also note that there are several fees associated with this type of loan, which in total can run approximately $2,000 or more.

Is this type of loan really worth it?

Depending on your financial situation, your urgency to move out of your current home and secure funding for your new home, yes, it is absolutely worth it. But only you can determine that for yourself based on your needs as a homeowner.

Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.