Many homebuyers assume that applying for a traditional mortgage is their only option for financing a home purchase. However, that couldn't be further from the truth. Applying for a traditional mortgage can be a painful and painstaking process. Bridge loans, on the other hand, offer a unique alternative that's quicker, more flexible, and more competitive in today's market. However, bridge loans offer a unique alternative that’s quicker, more flexible, and more competitive in today’s market, and it uses your current home as collateral.
Here’s what you need to know about the process to get started yourself.
What Is a Bridge Loan?
A bridge loan is a short-term financing solution with terms that last from six to 18 months. These loans are designed to “bridge the gap” and provide borrowers with quick and relatively easy access to the cash they need to purchase a property. These short-term loans are more accessible to those without excellent credit, solid income histories, low debt, or substantial financial documentation.
How Does a Bridge Loan Work?
A bridge loan, also known as a swing loan or gap financing, doesn’t work like a typical mortgage loan, thanks to its temporary nature. Instead of making regular and fixed payments over a long period, bridge loans are structured differently. Many bridge loans don’t require payments for the first few months or only require you to pay the accruing interest. However, they will require a large balloon payment at the end of the loan to cover the remaining principal balance.
You can either pay off a bridge loan when your old home sells or with permanent financing from another lender.
Can You Buy a House With a Bridge Loan?
While investors commonly use bridge loans to purchase residential and commercial real estate, it’s possible to purchase a primary residence home using a bridge loan, too. Bridge loans offer more accessibility and flexibility for property owners who already have an existing property and will pay it off by the time the other home sells. They aren’t a great option for first-time homebuyers, but they can serve other types of homeowners.
Why Buy a House With a Bridge Loan?
The odds are that bridge loans probably aren’t the first thing you’d consider when buying a home. With that said, there are several reasons why they might be a beneficial option to consider when looking for your next home.
More Competitive Offers
Using a bridge loan to buy a home allows you to make more competitive offers by making contingent offers. Often, buyers make offers on homes that are contingent upon their current home selling. However, in this hot seller’s market, many sellers don’t even consider offers with contingencies like these.
Instead, you need to make a competitive offer using a bridge loan that allows you to bypass these contingencies. And while this may seem like a risky move, the seller’s market works in your favor here since you can pretty much guarantee that you’re going to get multiple offers and be able to sell your home quickly.
More Flexible Timeframes
Using a bridge loan to buy a home also provides you with a more flexible time frame as compared to long-term financing. Buyers are often stressed and overwhelmed with the idea that they have to close on two different homes simultaneously — the old and the new — move out of one and move into another in a short time.
Instead, you can have more freedom and flexibility over your timeframes. You can purchase a new home before your current home sells and not have to worry about getting everything ready and moving out quickly. So instead of stressing over closing and moving timeframes, make the entire process easier on yourself by utilizing a bridge loan.
Higher Down Payments
Finally, using a bridge loan to buy a home allows you to put more money down, making your offer even more competitive. With a bridge loan, you can borrow the home’s total price — down payment and all. This is an excellent option if you cannot swing the recommended 20% down payment amount that can be extremely difficult for first-time homebuyers to attain. On the other hand, it allows current homeowners to better compete with cash offers before selling their homes and accessing their equity.
The Process of Buying a House With a Bridge Loan
Here’s what you need to know about the process of buying a house with a bridge loan:
Step 1: Find a Home
First of all, you need to find a property that you want to purchase. It’s always a good idea to work with an experienced and reputable real estate agent that’s familiar with your local area. They can use their resources to find you the perfect property. Once you’ve found the home you’re looking for, you need to act quick so that you can stay competitive in such a fast-paced market.
Step 2: Find a Lender
Finding a bridge loan can be challenging, if you don’t know where to look, since many traditional lenders, like big banks, don’t offer these types of loans. Instead, the best option is to go with a specialized bridge loan lender like Vaster Capital. Vaster Capital offers a wide range of different lending solutions with knowledgeable brokers who can make tailored recommendations based on your unique financial situation.
Step 3: Apply for the Loan
Once you’ve found the right lender, you need to apply for the loan. To ensure a smooth and speedy process, you should prepare documentation regarding your bank accounts. Your lender will also run your credit report to check your credit score and overall financial history.
Step 4: Get Approved and Close on the Loan
After submitting your application, the lender will consider your documentation and make a decision. The good thing about bridge lenders like Vaster Capital is that they are extremely flexible and easy to work with. Buyers who want to close quickly can rely on us for quick funding – in as little as a week. Even if you don’t have the best credit score, you can still secure the loan amount you need to buy a home. Once you’re approved, you can quickly complete the transaction, close on the loan, and get the keys to your new home.
Step 5: Repay the Loan
Unlike traditional loans that take decades to pay off, bridge loans are short-term in nature and usually need to be paid off within three years. So how does this work?
Alternatives to Bridge Loans
While bridge loans can be used to buy a home, they may not be right for everyone. So if you’re looking for alternatives to bridge loans, you may want to consider conventional loans, FHA loans, and home equity loans. Here’s what you need to know about each so that you can make the best possible financial decision:
1. Conventional Loans
Conventional loans are the most common loan used when buying a home. They have long terms — either 15 or 30 years of monthly payments. They can have either fixed or variable interest rates. With conventional loans, you can put as little as 3% down. However, you usually need a solid credit score and work history to qualify.
The better your credit score and the larger your down payment — the better your interest rate. Right now, interest rates for conventional loans are averaging at 3.37% APR for a 30-year fixed loan. For 15-year fixed loans, interest rates are averaging at 2.63% APR.
2. FHA Loans
FHA loans are a federally-backed option designed for buyers that would have a hard time qualifying for conventional loans on their own. Since the federal government backs these loans, lenders aren’t the ones taking the risk. FHA loans are available for buyers with credit scores above 580 with a down payment of at least 3.5%.
However, you are required to pay a mortgage insurance premium if you put less than 20% down. If you can put more than 20% down, your mortgage payments will extend for 11 years instead of 15 to 30 years. FHA loans have higher rates, with current 30-year fixed loans at 3.760%.
3. Home Equity Loan
If you already own a home with substantial equity built up, you may want to consider a home equity loan. To use a home equity loan, you will need at least 20% equity in your home. You can then use this equity to cover down payments, renovation costs, closing costs, etc.
Final Thoughts on Buying a Home With a Bridge Loan</h2>
Buying a home before selling your current residence with a bridge loan is easy, thanks to Vaster Capital! Reach out to our financial experts today for more information, so that you can find a lending solution that works for your situation and goals.
Sources:
How a Bridge Loan Can Help You Buy Your Next House | NerdWallet
7 Documents You Need When Applying for a Home Loan | Credit Karma
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