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Bridge Loan to Buy a Home

Bridge Loan to Buy a Home

      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.  Bridge loans are relatively uncommon and are typically used by investors who are looking to remodel and sell a property, also known as flipping, before the bridge loan expires.

      A homebuyer may decide to use a bridge loan if they believe their financial or credit profile will improve in the future.  For example, a buyer may want to purchase a home today but has a low credit score or limited employment history.  The buyer can use a bridge loan to buy the property now and refinance their mortgage in a year when their credit score increases or they have two years of employment history.

      Another scenario when a bridge loan is used is when a homebuyer would like to buy a new home but they have not sold the property they currently own so they do not have sufficient funds for a down payment.  In this case, the homebuyer can use a bridge loan to pay for the down payment for the new property and then pay-off the bridge loan with the proceeds from the sale of of the property they currently own.  In this scenario, the borrower must be able to afford to pay for the bridge loan plus any mortgages on their current and new properties so it can be very expensive.

      A bridge loan can be structured as a loan on a single property (structure typically used by 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.

      Bridge loans are typically one-to-two years in length and are structured as interest-only loans with a balloon payment at the end of the term.  With an interest only mortgage you do not pay down the principal balance over the course of the loan and instead the full loan amount is due at the end of the mortgage.  Some bridge loans may require the borrower to pay a pre-payment penalty if the loan is paid off within a specified time period, typically six months.

      A bridge loan typically costs the borrower significantly more money than a traditional mortgage.  The interest rate on a bridge loan is typically 2.5% - 3.5% higher than the interest rate for a normal mortgage and bridge loans also charge higher lender fees.

      Bridge loans can be challenging to find as they are typically offered by smaller, local lenders or hard money lenders.  It may be to the borrower’s advantage to work with one lender on both the bridge loan and the permanent mortgage as this can potentially reduce costs and streamline a complicated process.

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