What is a bridge loan? A look at how it works.

[Michael Iuculano]

What Is A Bridge Loan? A Look at How It Works.

Buying a new house can be problematic for people with existing homes that have not yet sold. This is because money from the sale of the old home might be necessary to put down on the new home. Bridge loans provide a way of closing on the new house while waiting on the eventual sales of the old property.

Bridge loans are very short-term loans made to people under extenuating circumstances. These are usually targeted at bridging a short term gap that is not well served by traditional loan products. Due to their very short-term nature, bridge loan providers can be more flexible with terms for people in unusual situations. For example, a company might need a short-term bridge loan while awaiting the proceeds from a lawsuit or sale of an asset. As long as there is a reasonable expectation of a short-term influx of money and collateral to secure the loan, bridge loan funders are typically willing to work with people who need money fast.

In the case of an unsold home, these loans can serve as the perfect vehicles to execute the contract on a new home purchase. These can also be used in cases where a mortgage company is taking an unusual amount of time to approve a new home loan. The only thing you must be concerned about is whether or not the use of the bridge loan can compromise the final execution of the final mortgage as some lenders will shy away from a transaction where bridge funding has come into play. Make sure to discuss the use of bridge loans with all parties prior to consummating a transaction.

Bridge loans are best obtained through Financial Conduct Authority (FCA)-regulated brokers. This is because they will only take cases that they believe are appropriate for the borrower. Smaller loan vendors might offer loans that eventually put their clients in a difficult position because they based their assessments on unrealistic assumptions. It might appear like they are doing you a favor by offering the loan in such circumstances, but if you are stuck in a position unable to meet the terms of the loan your credit and financial solvency can be negatively affected. You can find a plethora of regulated brokers by searching for such terms as hard money lenders Phoenix on your preferred search engine.

There are multiple ways a bridge loan can be used in a transaction. A large bridge loan can be used to pay off all outstanding debts and liens on a property, essentially consolidating the existing debt in one provider prior to a secondary transaction. Alternatively, the bridge loan can be a smaller second or third mortgage on top of existing loans. This money can then be used for a down payment on a new property or for other purposes depending on the situation. The first option is particularly attractive as the bridge loan provider does not need to worry about other liens on the property, and the borrower does not have to make any payments until the old house sells. In either scenario, once the house sells, the bridge loan is paid in full plus the agreed to interest.

Bridge loans can be an interesting option for people who need to complete the purchase of a new house when an old house sits unsold. However, before entering into such an arrangement, the borrower should carefully consider all the risks, the chief being when the old house is likely to be sold.