Buying a home is a big decision filled with make-or-break decisions. Perhaps one of the biggest decisions is figuring out what type of loan you want to use. Most people assume that they have to go with a traditional loan that can be inflexible in terms of timelines and requirements. However, residential bridge loans offer an appealing alternative.
Here’s what you need to know to determine if this type of loan would work for your situation:
What Is a Residential Bridge Loan?
A residential bridge loan is a loan product that allows homeowners to “bridge the gap” between buying a new home and selling their old home. This loan product is designed to be temporary in nature with terms that rarely extend past one year. It is a unique loan product that is usually only offered by specialized lenders.
How Does a Residential Bridge Loan Work?
A residential bridge loan works differently from other types of loans. Bridge loans, also known as swing loans, gap financing, or interim financing, are a short-term financing option that typically come with low monthly payments and some monthly interest before a large fixed repayment date at the end of the year-long loan term. There’s no making equal monthly payments for a long period with bridge financing. Managing the balloon payment shouldn’t be difficult once you have sold your existing home. In fact, in such a competitive seller’s market, most people can cover the loan expenses well before the end of the term, thanks to quick home sales.
Pros and Cons of Residential Bridge Loans
Using a bridge loan to purchase a home comes with both pros and cons. Here’s what you need to know to weigh your options:
Bridge loans offer flexible requirements that make them accessible to borrowers with a range of circumstances, like lower credit scores and lacking financial histories, and there may not be a maximum loan size.
Bridge loans offer quicker processing timelines that allow you to remain competitive in a fast-paced real estate market while you are working on securing a permanent financing option.
Bridge loans allow you to purchase a new home without having to sell yours first or simultaneously as long as you meet current obligations.
Bridge loans may come with higher interest rates and fixed legal fees than other types of loans or long-term financing due partly to their qualifications and convenience.
Bridge loans often require large balloon payments at the end of the term that can be difficult to make if you haven’t yet sold your home.
Bridge loans are a short-term loan product that many brokers do not offer — so they can be hard to find if you don’t know where to look.
When Should You Use a Residential Bridge Loan?
It can be difficult to determine if a bridge loan is best for your situation — which is why we are here to help! Here’s when you may want to consider using a residential bridge loan:
You’re finding it difficult to compete in hot real estate markets. Markets all across the country see unprecedented competition, with many properties receiving multiple offers above the asking price with no contingencies. If you want to submit a more competitive offer with no contingencies that give you a better chance of winning the home, you should consider a bridge loan.
You plan on selling your home at a later date. The timing and logistics of selling and buying at the same time can be impossible to manage. If you’re looking for a less stressful process, you may want to consider purchasing a new home first and then selling your home when you’re ready. Using a bridge loan allows you to buy a new home without needing to sell yours first. Then when your home sells, you can pay off the loan.
You can’t come up with the funds for a down payment without first selling your home. In a perfect world, you could use your current home equity as the down payment on a new home. However, you first need to sell your home to access this equity. If you can’t get the funds elsewhere, you can use a bridge loan to cover your down payment until you can access your home equity.
How To Secure a Residential Bridge Loan
Securing a residential bridge loan is easy if you know what to do. Here’s everything you need to know:
Find a lender. Not all lenders offer bridge loans, so you may need to look beyond traditional lenders like big banks. Bridge lenders like Vaster are a great option. Vaster prioritizes transparency, efficiency, and customer service to ensure that the entire process goes smoothly from application to closing and eventually repayment. Just make sure to check reviews or references from any lender you’re considering.
Prepare your application. While bridge loans may not require as much paperwork as traditional loans, you still need to prepare and gather all required documentation. You may need to provide your income tax returns, income statements like W-2s or 1099s, and account statements, depending on the lender. The faster you can provide all required documents, the faster the lender can process your application.
Approval and closing. The lender then processes and hopefully approves your application based on the information and documentation you provided. Most bridge lenders then offer expedited closing processes that allow you to close on the loan in a matter of days rather than weeks — enabling you to move forward in the home buying process quickly.
Alternatives to Residential Bridge Loans To Consider
Residential bridge loans can be beneficial to those looking to buy and sell a home simultaneously. However, they might not be the right option for everyone. If bridge loans aren’t for you, you may want to consider a conventional loan, a home equity loan, a home equity line of credit, or a hard money loan.
1. Conventional Loans
Conventional loans are commonly used for buying homes thanks to long terms and low interest rates. For instance, most conventional loans have terms of either 15 or 30 years. If you want the lowest possible interest rates, you should go with a 15-year term. Currently, interest rates for 15-year fixed-rate conventional mortgages average about 2.63% APR.
On the other hand, interest rates for 30-year fixed-rate conventional mortgages average about 3.37% APR. With that said, it’s important to note that your exact interest rate can be either higher or lower than these averages, depending on your finances.
It can be difficult for people with lower credit scores to secure conventional loans since you need a credit score of at least 620 to qualify. With a credit score of 620, you’re not going to get the most favorable interest rates. Instead, you should aim for a credit score above 700 to get lower interest rates and save money on your mortgage costs.
2. Home Equity Loans or Home Equity Lines of Credit
If you already own a home with at least 20% equity, you could also use a home equity loan or a home equity line of credit (HELOC). While these two options may sound like the same thing, there are some key differences to note.
A home equity loan provides you with a lump sum of cash. On the other hand, a home equity line of credit essentially acts as a credit card and allows you to access funds at your disposal. As a result, you will only pay interest on what you borrow rather than having to pay interest on the entire amount — whether you end up using it all or not.
Both home equity loans and home equity lines of credit come with relatively low interest rates since you’re accessing your own equity and are using your home as collateral. The average interest rate for a home equity loan is 5.94%, with an average range between 3.25% and 7.94%, depending on creditworthiness. The average interest rate for a home equity line of credit is 3.88%, with an average range between 1.74% and 6.85%, depending on creditworthiness.
3. Hard Money Loans
If you’re looking for quick and easy cash in a process similar to that of a bridge loan, there are also hard money loans. Hard money loans don’t have very strict qualification requirements since lenders know they’re able to repossess the asset in question and sell it off to get their money back.
With that said, hard money loans come with the highest interest rates reaching 15%. As a result, hard money loans are only recommended for short-term use to avoid racking up a ton of interest.