Without a low debt-to-income ratio, it can be hard to qualify for a bridge loan, given the cost of two mortgages. And finally, these loans are typically reserved for those with the best credit histories and credit scores.
Unlike a term loan, which requires a minimum of a 650 credit score, a true Hard Money Bridge Loan does not have a minimum credit score requirement and can even fix your credit score.
Expect an approval and funding timeframe of 30-45+ days from a conventional lender. A bridge loan from a hard money lender can be approved and funded very quickly, especially when compared to an average timeline of a conventional lender such as a bank or credit union.
To qualify for a bridge loan your lender will look at standard credentials like your debt-to-income ratio, how much home equity you have, your credit card score and possibly your household income. It helps if you've been a good mortgage candidate with your first home.
Both asset refinancing and invoice finance can be put in place quickly and can provide a cheaper alternative to bridging finance. Other alternatives include development finance, commercial loans, secured loans, commercial mortgages and asset loans.
Bridge Loan Cons
The cons of a bridge loan typically involve a high interest rate, transaction costs and the uncertainty in the sale of the asset where the money it tied up. Bridge loans are meant to be temporary devices to free up money that is tied up pending the sale of the real estate asset.
Bridge loan terms are typically six months but can range from 90 days to 12 months or longer. To qualify for a bridge loan, a firm sale agreement must be in place on your existing home.
Typically, it should take about two to three weeks for you to receive your loan after being approved for a loan request.
A bridge loan in real estate can be used to buy another home before you sell your current one. A bridge loan essentially helps fund your new home purchase. For example, you might use it to cover closing costs for a new mortgage.
Bridge loans typically have interest rates between 8.5% and 10.5%, making them more expensive than traditional, long-term financing options. However, the application and underwriting process for bridge loans is generally faster than for traditional loans.
A balloon payment is a larger-than-usual one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan.
HELOCs have very competitive interest rates, are usually adjustable rate loans and typically have no closing costs. You can use a HELOC in the same way you use a bridge loan if you are trying to purchase a new home. HELOCs are usually granted to only creditworthy borrowers.
Many financial institutions will only extend a bridge loan if you also use them to obtain your new mortgage. You may own two houses for a time – and managing two mortgages at once can be stressful. Trouble selling your property can lead to future issues, or – in a worst-case scenario – even foreclosure.
If you want to take out a mortgage on a paid-off home, you can do so with a cash-out refinance. This option allows you to refinance the same way you would if you had a mortgage. When refinancing a paid-off home, you'll decide how much you want to borrow, up to the loan limit your lender allows.
Which banks offer bridge loans? A number of high street banks and private lenders offer bridging loans. Most of these are only available through loan brokers, as even high street banks do not normally offer bridge loans direct to the public.
It's possible to buy a new house before selling your old one, but it can be tricky to do using traditional methods if you don't have the cash to make a non-contingent offer on your own. No matter what, you'll want to work with a real estate broker that can help you align the buying and selling aspects of your journey.
Does a bridging loan affect your credit score? A bridging loan can affect your credit score. However lenders are not primarily concerned with credit scores but will run credit rating checks on their applicants. If you are unsuccessful in applying for a bridging loan, then this will show on your credit file.
A HELOC is the best option but only if you can afford the payments on the HELOC, the old mortgage, the new mortgage, and any other debt obligations you may have. A bridge loan may be more expensive but you do not have to make payments on it or the old mortgage until the home is sold.
While bridge loans are typically due once your original home sells, a home equity loan can still be used even after the sale of your home.
The cash you can get out of your home depends on the amount of equity you have in your home, as well as your lender's guidelines. A typical HELOC lender will allow you to access 80% of the amount of equity you have in your home but some lenders might go up to 90%, though usually at a higher interest rate.
A jumbo loan (or jumbo mortgage) is a type of financing where the loan amount is higher than the conforming loan limits set by the Federal Housing Finance Agency (FHFA). The 2022 loan limit on conforming loans for 1-unit properties is $647,200 in most areas and $970,800 in high-cost areas.
What is a balloon mortgage? A balloon mortgage is structured as a typical 30-year principal- and interest-payment loan for a set period of time, say five or 10 years. But at the end of that five- or 10-year term, a lump-sum payment, equal to the remaining balance of what you owe, is due.
Balloon payment schedule
A 30/5 structure means the lender calculates your monthly payments as if you'll be repaying the loan for 30 years, but you actually only make those payments for five years. At the end of the five-year (60-month) term, you'll repay the remaining principal, or $260,534.53, as a lump sum.
Simply put, a hybrid mortgage combines features of a fixed-rate mortgage and an adjustable-rate mortgage (ARM). A hybrid mortgage is a home loan with a fixed interest rate for a specific period of time, after which the rate adjusts periodically for the remaining loan term.