There are types of loans for various kinds of needs. Lenders offer these loans to meet the needs of the borrowers. Bridge loans are among the various loan types available. In this article, we will look at; what a Bridge loan is all about. Also, the pros and cons and interest rates of Bridge loans and so on.
What is a Bridge loan?
A Bridge loan is a short term loan used until a person or company secures a permanent cash flow or removes an existing commitment. Bridge loan helps the borrower to meet current commitment by providing instant cash flow. Bridge loans are usually short term, up to one year. They have high interest rates. You can get the loans by some form of collateral, like in real estate or inventory.
Homeowners can use Bridge loans when they want to purchase a new home while they await the sale of their current home.
What are the Bridge loans requirements?
Just as there are requirements for other types of loans, Bridge loans have requirements too. However, the requirements for Bridge loans can differ from one financial institution to the other.
The following are the common requirements for Bridge loans:
- The lenders will find out whether you can afford to make multiple loan payments.
- An equity of 20% minimum in your home must be in place.
- How fast will your home sell? Is also important.
- You show that you’ve handled debt responsibly in the past (excellent credit history).
- Show a breakdown of how you intend to use the loan.
- Your resume, showing a track record of creditworthiness, will increase your chances of getting a Bridge loan.
What is the Bridge loan maximum loan amount?
The maximum loan amount you can get from a Bridge loan should ring a bell if you need it. For a Bridge loan, the maximum amount you can borrow is usually about 80% of the combined value of your current home and the home you want to buy. Although, lenders may have a different rationale for Bridge loans they offer.
For instance, if your current home is worth R250,000 and the home you want to buy is worth R330,000, they would calculate your maximum Bridge loan amount this way: (R250,000 + R330,000) x .80 = R464,000.
How can I apply for Bridge loans?
As a borrower, you might need funds to cover expenses for a short period before you can secure permanent financing or payments. They call this Bridge financing (Bridge loan).
The following are how to apply for a Bridge loan:
1. Know whether you are financially stable:
Any financial institution you want to get a Bridge loan from must assess your financial stability. No lender will risk lending an enormous amount of money to a debtor with a terrible track record.
2. Compare available financial institutions:
Compare the options around when making financial decisions. Financial institutions have different terms of payment and requirements for Bridge loans. To be on the safe side, compare and contrast their terms for Bridge loans before getting it.
3. Get your documents ready:
Bridge loan lenders, especially the traditional ones, would prefer to see some of your financial activities. Activities such as tax payment and other financial information. This is to know whether you will be capable enough to pay back the loan.
4. Submit the application and communicate with your lender:
Get in touch with your lender, maybe through a phone call or a visit. Then submit all the required documents.
What are the Bridge loans’ interest rates?
Loans come with interest rates. Therefore, lenders will risk an enormous amount of money to a borrower. For the Bridge loans, the interest rates are between 8.5% and 10.5%. This makes Bridge loans more expensive than other traditional long term loan options.
What are the Bridge loans repayment terms?
Bridge loans have repayment terms just like every other form of loan. You must repay the Bridge loans within a 12-month period or less. Most people may decide to pay off their Bridge loan with money from the proceeds they get from the sale of their current home. The repayment terms usually differ from one lender to the other.
Are there any Bridge loans additional fees?
Additional fees are usually what borrowers worry about whenever it comes to loans. Additional fees in Bridge loans do not always come in. Although, it can differ from one lender to the other. One case where additional fees may come in is when you need to hire a real estate lawyer.
How fast are the Bridge loans released?
The need for a Bridge loan calls for the knowledge of how fast they release the funds. Most lenders can release the funds within one week of request. However, this depends on the processes involved which usually differ from one lender to the other.
Pros and cons of Bridge loans
Loans of all types have advantages and disadvantages. It is advisable to know them before applying for any kind of loan.
Pros of Bridge loans are:
- The processes involved in Bridge loans application consume less time than other types of loans.
- It gives you the fund you need to buy the new home you love before you sell your current one.
- It saves you the worries of the funds you need to buy a home before selling your current one.
Cons of Bridge loans are:
- Bridge loans attract higher interest rates because they have shorter terms. Lenders charge higher interest rates because they have less time to make money on the loan.
- Lenders can charge origination fees (to originate a loan). This could be as much as 3% of the loan value.
- The borrower must have strong finances to apply for a Bridge loan. The lender may place a strong minimum credit limit and debt-to-income ratio.
Conclusion
A Bridge loan figuratively Bridges the short-term cash and long-term loans. It sounds so cool to the ears, but weigh the costs and risks involved carefully. However, taking any form of loan is also a risk that circumstances have placed before us. While waiting to get your current home sold. And also, having to pay for a new home, a Bridge loan might be the way out.