BRIDGE LOANS: AN INTRODUCTION

BRIDGE LOANS: AN INTRODUCTION

BRIDGE LOANS: AN INTRODUCTION

Bridge loans are a short tem loan typically taken out for a period of 2 weeks to 3 years until a person or company secures permanent financing or removes an existing obligation. Thistype offinancingallows the userto meet current obligations by providingimmediate cash flow and also withrelatively high interest rates and is backed by some form of collateral such as real estate or inventory. Implying the term, these loans "bridge the gap" between times when the financing is needed.

They are used by both an individuals and corporations and can be customized for many different situations. For example, let's say thata company is doing a round of equity financing that is expecting to close insix months then a bridge loan could be used to secure working capital until the round of funding goes through. In the case of an individual, these loans arecommon in thereal estate market. As there can often be a time lag between the sale of oneproperty and the purchase of another, then this loan allows a homeowner more flexibility.

Many lenders do not have set guidelines for FICO minimums nor debt-to-income ratios, therefore, funding is guided by a more "make sense" underwriting approach. The piece of the puzzle that requires guidelines is the long-term financing obtained on the new home so some lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. This exactly means that borrower is qualified to buy the move-up home by adding together the existing loan payment, if any, on the buyer's existing home to the new mortgage payment of the move-up home. The reasons that many lenders qualify the buyer on two payments are:

Mostly, buyers have an existing first mortgage on a present home.

The buyer will likely close the move-up home purchase before he sells an existing residence.

The buyer will own two homes for a short term home.

If the new home mortgage is a conforming loan then lenders have more leeway to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan then most lenders will restrict the home buyer to a 50% debt-to-income ratio.

The benefits of buying bridge loans for home buying are that the buyer can immediately put a home on the market without restrictions. Second thing, these loans may not require monthly payments for a few months. Last but not least, if the buyer has made a contingent offer to buy and the seller issues a notice to perform then the buyer can remove the contingency to sell and still move forward with the purchase.

Similarly the drawbacks of these loans on buying home are that these loans cost more than equity loans. Also, buyers will be qualified by the lender to own two homes and many will not meet this requirement. Lastly, making two mortgage payments, plus accruing interest on a bridge loan could cause stress.

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