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How to Use Bridge Loan to Buy a Home

How to Use Bridge Loan to Buy a Home

    • How a Bridge Loan Works
    • A bridge loan is a short term loan used to purchase a property. A bridge loan is typically refinanced or paid off when the property is sold, prior to the end of the loan term. It is called a bridge loan because it serves as a financial bridge from the time you buy a home until when you either refinance it with a permanent mortgage or pay it off.

      There are several key points to understand about how bridge loans work. First, the loans are typically one-to-two years in length, so they are a short term financing option as compared to a 15 or 30 year mortgage. In short, bridge loans are meant to be temporary and paid off before you reach the end of the loan term. In most cases, it is best to payoff a bridge loan as soon as possible.

      Second, most bridge loans are structured as interest only loans with a balloon payment at the end. With an interest only mortgage, you pay no principal which lowers your monthly loan payment. This feature is designed to make the bridge loan more affordable for borrowers.

      It is important to highlight that with an interest only loan, you do not pay down the principal balance when you make your monthly payments so the full loan amount is due at the end of the term. For example, if you obtain a one year, $100,000 bridge loan, you owe the lender $100,000 when you decide to pay back the mortgage, even if you have made several monthly payments. In other words, your loan balance never changes.

    • Interest Rate and Costs
    • Bridge loans are not cheap and typically costs borrowers significantly more money than a traditional mortgage. Bridge loan rates are typically 2.5% - 3.5% higher than the rate for a standard mortgage and bridge loans also charge higher fees. Bridge loan rates depending on several factors including your credit score, loan-to-value (LTV) ratio, the property being financed and the purpose of the loan. Borrower should shop several lenders to find the bridge loan with the lowest interest rate and closing costs.

      Although they usually have short lengths, some bridge loans require that borrowers pay a prepayment penalty if the loan is paid off within a specified time period, typically six months. Make sure to review your loan terms carefully to identify a prepayment penalty or other charges before moving forward with a bridge loan.

    • Reasons to Get a Bridge Loan
    • There are multiple reasons to use a bridge loan to buy a home. The most common use case is for a bridge loan is when a you want to buy a new home but you have not sold the property you currently own so you do not have sufficient funds for a down payment.

      In this situation, the homebuyer uses a bridge loan to pay for the down payment for the new property and then pays off the loan with the proceeds from the sale of of the property they currently own. In this scenario, the borrower must be able to afford the bridge loan payments plus the payments for any mortgages on their current and new properties, so it can be very expensive. Having multiple mortgages also involves higher risk for borrowers and lenders which is one of the reasons bridge loan rates are higher.

      Another reason to use a bridge loan to buy a home is if you believe your financial situation or credit profile will improve in the future. For example, you may want to purchase a home today but a low credit score or limited employment history prevents you from qualifying for a standard mortgage. You can use a bridge loan to buy the property now and refinance the loan with a permanent mortgage in a year after you credit score improves or you have sufficient employment history to get approved for a traditional mortgage. So a bridge loan may be a good option if you cannot qualify for a mortgage but you do not want to wait to buy a home.

      Bridge loans are also frequently used by property flippers. For example, if you want to buy a property, renovate it and then sell, or flip it, you could use a bridge loan to finance the purchase. So a fix & flip loan is one type of bridge loan. House flippers like bridge loans because the interest only payments keep their costs down during the property renovation phase. Plus, in the best case scenario, you flip the home before the bridge loan expires.

    • Bridge Loan Collateral
    • A bridge loan is usually secured by a single property, which is the lending structure typically used by house flippers. In the case where a homebuyer would like to buy a new home but they have not sold their current home, the bridge loan may be structure as a second mortgage on the existing property but the mortgage is collateralized by both properties.

      A bridge loan that is secured by multiple properties provides the lender with a significant amount of protection in the event that you cannot repay the loan but this also exposes you to the risk that you lose multiple properties. Be sure to understand the potential downside of obtaining a bridge loan that is secured by two properties.

    • Loan-to-Value (LTV) Ratio
    • It is also important to point out that bridge loans usually have a loan-to-value (LTV) ratio requirement of 70% or lower, which means the loan amount cannot be greater than 70% of the value of the property being financed. The lower LTV ratio limit is lower than a standard mortgage and helps mitigate the risk for lenders.

    • Bridge Loan Lenders
    • Bridge loans can be challenging to find as they are typically offered by smaller, local lenders or hard money lenders, which are also known as private money lenders. Hard money lenders charge significantly higher interest rates and closing costs than traditional lenders. Given the costs involved, we recommend that borrowers work with one lender on both the bridge loan and the permanent mortgage, if possible, as this can potentially reduce expenses and streamline a complicated process.

      Use the FREEANDCLEAR LENDER DIRECTORY to find hard money lenders in your state

    • Rate Details*
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      Points  More Info:
      Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
       
      Total Lender Fees:  
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      Monthly Housing Payments
      P & I More Info
      Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
      Mortgage Insurance More Info
      Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
      (Estimated)
      Property Tax More Info
      Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
      (Estimated)
      Homeowner Insurance More Info
      Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
      (Estimated)
      Homeowner Association Fee More Info
      Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
      (If Any)
      Total Monthly Housing Payments
      Lender Fees
      Points More Info
      Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
      Origination Fee More Info
      Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
      Credit Report Fee More Info
      Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
      Tax Service Fee More Info
      Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
      Processing Fee More Info
      Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
      Underwriting Fee More Info
      Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
      Wire Transfer Fee More Info
      Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
      (If Any)
      FHA Upfront Premium More Info
      FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
      (If any)
      VA funding Fee (If any)
      Flood Fee
      Other Fees More Info

      Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

      The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

      Total Lender Fees
      *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
      Current Mortgage Rates as of October 19, 2018
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      Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
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