When a homeowner or a property investor wants to purchase another home but not immediately sell their current residence or income property, or even sell it before buying another, one problem typically exists. That problem being money and enough of it to make a down payment on a second property and/or payoff their current mortgage.
For property investors, bridge loans have been a crucial tool to facilitate the buying of new investment homes, while also providing residential homeowners with the ability to go through with a transaction. However, if you’ve begun to look into securing a bridge loan, you’ve likely come across a lot of information which clearly convinces you that these type of loans are no longer available.
While these kinds of debt instruments are not widespread, they still nonetheless exist. What’s more, if you are really unable to find and obtain this specialized financing, there are alternatives at your disposal. Either way, you ought to be able to find an option that works to bridge the gap, which of course, is where these loans get their name.
Types of Bridge Loans
One thing that most consumers are unfamiliar with when it comes to bridge loans is the fact these aren’t one-size-fits-all products. There are actually two different kinds of bridge financing, one provides enough money to make a down payment on a new property and amortize your current mortgage on your primary residence. The second kind gives you enough for a down payment but the funds do not amortize your current mortgage. Instead, a loan is given to you against the equity in your home.
A bridge loan is a way for a home buyer to fund a down payment for another home while still owning his old one. Bridge loan users sometimes technically carry two mortgages at the same time. A bridge loan is also only temporary in nature. The interest and principal balance on it are due and payable no later than when a buyer’s old home finally sells. There are also a couple of different types. —San Francisco Chronicle
With the first kind of bridge loan, you do not make any more payments on your current home but do have monthly installments which go to your new home. Once your old home sells, the sale proceeds amortize the mortgage and you continue to pay the new mortgage. In the second kind, you pay off the home equity financing when your old home is sold.
The time frames differ from lender to lender, but in general, most of these loans have a short term, typically six months. The reason, of course, is because it’s intended to provide short term financing for a brief amount of time. The costs of these debt instruments generally work-out to be the current going rate for a 30-year fixed mortgage, plus two percent. The fees associated with bridge financing are also typically higher. The reason for this is because of the inflated risk being taken by the lender.
Getting a Bridge Loan
One of the biggest challenges will be finding a lender willing to deal in this type of specialized financing. If you have a healthy bank balance and a long term relationship with a local or regional bank, you might find that to be the route to a bridge loan. National chains will not likely be a good source, but alternative lenders and non-traditional sources will give you a better chance. Here are some more options:
- Forgo applying directly for bridge financing. Instead of applying directly for bridge financing, take out a line of credit against your current property. You can also apply for a home equity loan in order to obtain the money you need to facilitate the new transaction.
- Tap into your current home’s equity by refinancing. As an alternative to getting a home equity loan or line of credit is to refinance your current property and pull out the money you need for a down payment on the home you want to purchase.
- Obtain a hard money loan. For this to be feasible, you’ll likely have to pledge substantial collateral of other assets, but it is yet another alternative to bridge financing. The downside here is the cost, as is will likely be more expensive than the first two options.
- Apply for secured credit. A secured line of credit will also require collateral, but will give you the funds you need to make a down payment on another property.
- Take out signature financing. Signature financing is a personal guarantee and will also come at a higher cost but will do the trick.
Another option is to seek a new mortgage using cross-collateral to back it and proceed through that route. With this scenario, you would pledge other assets in order to secure financing for a down payment and/or amortize your current mortgage.