What Is a Bridge Loan?

Do you have to move into a new home fast because of work or other obligations? Having trouble selling your current home within the necessary time frame?

If you aren’t sure how to pay for a new home before you can find a buyer for your current home, a bridge loan can help. If you’ve never heard of the power of the bridge loan,¬†this guide is for you.

Read on to learn more.

What Is a Bridge Loan?

If a company has existing debt or needs a loan until they receive permanent financing, a bridge loan may be the best option. This loan method is short-term and can be a source of capital or funding.

Companies aren’t the only ones who can benefit from a bridge loan. In fact, these loans are often used for real estate transactions, not just business funding.

When you obtain one of these loans, you’ll have the means to finance a new home purchase before you need to sell your current home.

Those who need to move to a new property because of work or other obligations will take out a bridge loan to pay for a new home before selling an old home. These loans can be secured by using your current home as collateral.

How Does a Bridge Loan Work?

If you need financial help during the home buying process, using a bridge loan is your key to success. A bridge loan will work differently depending on the lender you choose to go with.

For example, some bridge loans can pay off a mortgage before the loan closes. Other loans will pile on debt to the number of loans you already own.

The lender will decide if you make monthly payments, an upfront payment, or pay a lump sum fee. Typically, the interest fees are a little above the prime rate but this will depend on your lender as well.

How to Apply for a Bridge Loan

You can apply for a bridge loan similar to how you would apply for a conventional mortgage. A bridge loan service will consider numerous factors such as:

  • Credit score
  • Credit history
  • Debt-to-income ratio

Because your current home serves as collateral, you should have at least 20% equity in your home to qualify. You can borrow a maximum of 80% of your home’s equity.

Bridge Loan Alternatives

A bridge loan is not the only option when you are in a financial management pinch due to the current real estate market. The other two most common loans for homes are home equity loans and home equity line of credit.

Both work similar to a bridge loan but have their own specific advantages. You can also use a personal loan if none of the above options work out.

Do You Need Financial Help?

Buying a home when you haven’t sold your¬†current one can bring your stress level to 100. However, there are financial tools out there that can make this process easier.

A bridge loan can help you during a real estate crisis and even help businesses with short-term funding. As with any loan, understand the implications of adding more debt to your portfolio before making a decision.

For additional financial advice and more, check out the other content on our blog.