A bridge loan is a complicated financial product, which means there are lots of questions that come up. Sometimes, these questions are hard to answer because so much is dependent on the individual circumstances of the borrower. However, here is some general information regarding a bridge loan.

Who Can Get a Bridge Loan?

If you want to purchase a second home before your first one sells, and you’ve been a good mortgage candidate in the past, you may assume that you will qualify for a bridge loan- but that’s not necessarily the case. The borrowing process is a bit different for a bridge loan than a traditional mortgage. On a positive note, you may experience a faster process than with a traditional loan.

That being said, not everyone will qualify for a bridge loan. Things like credit history, FICO score, loan-to-value, and debt-to-income (DTI) are all considered. The first thing you need to know is you need to have a lot of equity in your current home. This means that your home needs to have appreciated quite a bit from when you bought it, or you need to have made a dent in the principal.

The lender is also likely to check your DTI, which is the amount of money you spend each month compared to how much you make. It proves to lenders that you are not taking on more debt than you can pay. If you don’t have a low DTI, you’re not likely to get approved for a bridge loan.

Finally, a bridge loan is typically for those who have exceptional credit scores and histories. Minimum scores will vary by lender, but the higher your score, the lower your interest.

Advantages of Bridge Loans

The primary advantage of a bridge loan is that you can place an offer on a new home without any contingencies. This may be the only way to have your offer considered, especially if there are several offers on the table. Additionally, it allows your family to have the option to move quickly if necessary or if you need to move but you’re in a market where homes are sitting on the market for a long time.

That being said, you may be in a situation where your current home sells quickly and you need to move into temporary housing while you’re looking for a new home. A bridge loan can prevent this interim move because you’ll have the funds to secure a new home before your current one sells.

Disadvantages of Bridge Loans

A bridge loan can be quite expensive, as the interest rate is usually higher and there are fees associated with an additional mortgage. In addition, there’s the length of the term, which is typically 12 months or less. Plus, having to juggle two mortgages can be stressful, no matter what your situation.

Finally, as mentioned, not everyone will qualify. You need to have equity built up in your current home and have a stellar credit profile to be considered. Also, not every lender offers them. You may have to find a different lender than the one that has your primary mortgage.

Is a Bridge Loan a Good Idea?

When it comes to financial solutions, no one solution works for everyone- it depends on a variety of factors. A bridge loan is a great option for “bridging the gap”- but it may not be the best solution for you. Then again, it may help you eliminate the crunch for cash and get you into your new home before your current one sells. Either way, contact BT84 Commercial Capital & Business Solutions to learn more about how a bridge loan can help you.