Bridge loans: Understanding the requirements
A bridge loan works a bit differently than other home loans.
It’s typically a short-term loan to help you “bridge the gap” of buying and selling a home at the same time.
A bridge loan often has a
- 6 to 12 month term
- A higher interest rate
Before you consider taking out a bridge loan, it’s important to understand the requirements so you’re not caught by surprise when it’s time to pay up.
Unlike some other home loans out there, a bridge loan isn’t a long-term loan. It’s designed for a much shorter period of time, which is typically only six to 12 months.
For many people that covers the gap when they’re trying to buy a home, but they haven’t sold their existing home just yet.
You need to know this going in. Because the loan is short, it typically comes with a higher interest rate than other loans.
Once the bridge loan comes due, you have to be ready to pay it off, along with its interest.
Because you’re starting a new loan, you’re also required to pay some extra fees.
Generally, the origination fee for a bridge loan can be quite high, as well.
That’s why it’s so important to understand all the costs before you sign any paperwork and accept the loan.
Generally, getting a bridge loan requires having relatively strong credit. A lender will likely consider your credit score, as well as your debt-to-income ratio.
Being in a questionable financial situation could make it harder to secure a bridge loan.
You’ll have to see if you even qualify for this type of loan before moving forward.
With a bridge loan, your current home becomes collateral. That’s because generally a bridge loan is attached to the property you’re planning to sell.
As part of the bridge loan, the lender requires equity in your current home.
This means, if you don’t pay your bridge loan off because your home hasn’t sold yet, the lender could potentially foreclose on your home.
For this reason, bridge loans often work best for consumers in areas where homes are known to sell quickly.
Even it a hot real estate market there may be an underlying reason why your home doesn’t sell right away. It’s extremely important to make sure your home is priced right and appears attractive to new buyers.
How long do I have to pay it off?
Generally, you have to pay off a bridge loan within 12 months.
While some lenders require monthly payments, others require a lump-sum at the end of the loan term.
When you do sign off on the loan, you’ll know that date so you can start preparing to fulfill the requirements of the loan.