What is a bridge loan?
It's not always easy coming up with cash for unexpected or large expenses. Fortunately, there is a specific type of loan for these unique circumstances.
Bridge loan definition
When prospective homebuyers need additional finances that are not immediately available, they might apply for a bridge loan. These short-term loans are used to secure funding for large purchases, usually when the buyer is motivated to act quickly but doesn’t have the cash on hand to complete a sale.
Real estate bridge loans offer a convenient option when the need to move is pressing and unexpected. While their current home goes up for sale, homebuyers may not have the money on hand to cover the many expenses associated with closing a new mortgage. Down payments, closing costs and appraisal fees can all be securely covered with the utilization of a bridge loan.
Risks of a bridge loan
While home bridge loans can help cover a gap in funding, they do typically come with higher cost for the borrower.
The short-term nature of bridge loans means lenders will not make as much in processing and interest as they would with a longer-term loan, such as a mortgage. To make up for this lower return, lenders will usually charge additional interest and fees.
Lenders will also seek additional security through a borrower’s assets. The buyer’s current home is usually put up as collateral in order to secure the bridge loan. The lender will retain partial ownership of the property until it is sold and the remainder of the loan is repaid.
Other assets such as vehicles or bank accounts can also be used as bridge-loan collateral.
When are bridge loans a good idea?
Sudden life changes like a new job could mean an unexpected need to relocate. Homebuyers in this situation may not have the savings on hand to completely cover the costs of closing on a new loan. Bridge loans can help cover this gap and ensure buyers will have the funds to bid on a new house.
A prospective buyer might also consider a bridge loan to secure an offer in a competitive market. Making up the gap in funding means the borrower will be able to present the seller with an offer that will move quickly. Other offers might come with a contingency that the sale will go through if the buyer cannot sell their current home. Securing a bridge loan will allow borrowers to present a contingency-free offer, meaning the sale will not depend on external factors and is much more likely to proceed without delay.
Sellers and their real estate agents will always prefer a contingency-free offer in a situation when multiple bidders vying for the same property. In this type of sellers’ market, bidders with a more expedient and risk averse proposal will always stand out.
Bridge loans provide a path to homeownership for buyers on a short-term schedule. Short-term loans like these help cover some costs when buying a home, but come at an additional expense for the buyer.
Learn what other loan options lenders can provide to help buyers secure funding for a home.