Thinking about buying a new home through mortgage options? But, there is another option available along with the many choices of fixed-rate and adjustable-rate mortgages, called a Bridge Loan.
In another sentence, a bridge loan covers the financial requirements that arise when a home buyer thinks about purchasing a new home before selling the existing home. For example, when a home buyer buys another home before selling an existing home, two common ways to find the down payment for a move home is by funding either a bridge loan or a home equity loan.
Applying for a loan is a decision that requires careful consideration. So do – Bridging Loan! But before undertaking a bridge loan, you need to speak with a trusted advisor. Such types of loans offer more benefits to borrowers. The main advantage of a bridge loan is that it allows you to buy a new home without the unexpected selling costs.
This type of loan is provided by both licensed moneylenders and bankers whether you’re lending money online or in-person. Since bridge lending is used as a temporary measure, this form of lending is extremely short-term in nature as these are issued for a period of no more than one year.
Along with this, there are various things that you need to take into consideration before applying for a bridging loan. Let’s have a look at those.
Table of Content
What is a Bridging Loan?
How Does a Bridge Loan Work?
Things to Consider Before Applying for a Bridging Loan
- Having a Secure Exit Strategy
- Consider Repayment Duration Period
- Determine Its Cost
- Choose the Right Solicitor
Bottom Line
What is a Bridging Loan?
A bridging loan is a short-term loan with a high-interest rate. It is a good option if a buyer requires an urgent cash loan today for commercial or his/her needs. This is called a bridge loan because it bridges the gap between the sale price of a new home and a new buyer’s new mortgage if the buyer’s home has not yet been sold.
How Does a Bridge Loan Work?
A couple of options come in a list for bridge loans. Some moneylenders who make qualifying loans exclude the payment of the bridge loan for passing purposes. This means that the borrower has the right to buy a new home by adding together the existing loan payment to the new mortgage payment. The reasons many lenders qualify the buyer for two payments are due to the fact that –
- Most buyers have an existing first mortgage on a real home.
- The buyer is likely to close the purchase of the home for purchase prior to selling the existing residence.
- In the short term, the buyer will own two houses.
If the new home mortgage loan is a qualifying loan, lenders are more able to accept a higher debt-to-income ratio by managing the mortgage through an automated underwriting program.
Things to Consider Before Applying for a Bridging Loan
Having a Secure Exit Strategy
Licensed moneylenders are specialists and provide the equivalent finance facility that is only intended for the short-term. Therefore, it’s important to have a secure and viable strategy in order to acquire a bridging loan. With the availability of higher monthly interest rates and a fixed duration period, you can’t borrow for longer than is necessary, some money lenders in Singapore may also ask for renewal fees if you go over the agreed term. That is why make sure you have a secure exit strategy or a back-up option if you fall into a wrong situation.
Consider Repayment Duration Period
Generally, bridging loans are repaid through various methods like sale of the property, refinance to longer-term debt, and money that is due to you but has not yet been received. Whether you’re looking to refinance onto a cheaper form of debt or selling the property or anticipating money coming to you, determine everything in advance. While selecting the term of your bridging loan, it’s recommended that choose a short time frame to reduce the interest rates. If you choose to take the refinance route, ensure the application you intend on submitting is realistic and likely to succeed.
Determine Its Cost
The interest rate charged on bridging loans is often higher than a mortgage or other loan. This is because most lenders are concerned about higher risk in bridging loans. But, these loans are available for a short period only and the interest is only charged until the loan is repaid. Therefore, a borrower has to pay the loan within an actual duration in order to avoid the high-interest rate. Basically, these loans are flexible and can be repaid more quickly than mortgages.
Choose the Right Solicitor
Before applying for bridging loans, it’s recommended that you pick the right solicitor so that you can repay the loan on time without any issue. A solicitor is experienced and will ensure that the legal process runs smoothly and quickly. He/she will act between you and the lender and help in choosing the right and legal terms of the loan. With this in mind, your solicitor should be well versed in dealing with bridging loans.
Bottom Line
A borrower always needs to be aware of the risk involved in private loans like bridging loans. Through this, a borrower can get independent financial advice from an expert who can explain the pros and cons of taking out bridging loans. In addition, a person also needs to acquire as much information as possible about all aspects of bridging loans so that they can make informed decisions on whether or not it’s the right decision for them.
