If you have ever been stuck in between the purchase of your new home and the sale of your old home, understanding bridging loans would have been helpful. Nothing is worse than paying two mortgages when it is unexpected. Thankfully, bridge loans have been created by lenders to help address this challenging situation.
Bridging loans are temporary term loans that help to bridge this gap between the closing of the present home and the closing of the new home. Despite this not being a common scenario, under a few occasions there is a longer time frame than was initially anticipated. The bridge loan helps the property owner to cover their simultaneous mortgage costs, with the proceeds from the bridge loan being also used towards the down payment on the new property once closing occurs.
The Bridge Loan Process
As with any home mortgage, the buyers must go through underwriting to become approved for a bridge loan. Every lender will often have their own approval procedure that must be followed in order for the owner to be approved for the bridge loan. And, these qualifications are often more lenient than traditional home lenders when it comes to debt to income ratios, meaning that these ratios can often be higher than with traditional lending.
The rationale of different requirements associated with the bridging loans is that they are temporary and generally created to assist a property owner in moving from their current property into their new property. And, the proceeds from the bridge loan are almost always applied to the new home loan in the event that they are not used during the transition period before to closing on the new home.
Benefits of Bridge Loans
There are a number of benefits to the property buyer of bridge loans, including:
It allows the property owner to put their property onto the market quickly and often with less restrictions than if they didn't have the additional financial cushion.
A lot of bridge loans don't require monthly loan or mortgage payments, providing some financial relief to the current property owner.
The loan can give the property owner some flexibility with contingencies on their home sale, allowing them to turn away offers that are not favourable without financial fear of paying two mortgages in the event that their new property closes as anticipated.
Disadvantages of Bridge Loans
While there are multiple advantages to using a bridge loan when selling or buying properties, including:
The costs associated with bridge loans are typically more than traditional home loans and even home equity loans.
Some property owners may not qualify for a bridge loan due to the lending qualifications
Even though the bridge loan helps the property owner in covering mortgage costs during the transition process between properties, they must still pay for both loans and the interest that is accruing on the bridge loan.