To Understand Bridging Loans

To Understand Bridging Loans

by Nathaniel Richardson on

Have you ever been stuck in between a new property and the old one, paying both mortgages. Paying two mortgages can be challenging, especially when it is not planned. Thankfully, bridge loans have been created by lending institutions to help address this financial challenge.

Bridging loans are temporary term loans that assist to bridge this lag time between the closing of the present property and the purchase of the new home. While it is not a common scenario, under some occasions there is a longer time frame than was initially anticipated. The bridging loans can help the buyer to manage their dual mortgage payments, with the funds from the bridge loan being also used towards the down payment on the new property once closing occurs.

The Bridge Loan Procedure

As with any home mortgage, the buyers must go through underwriting for approval for a bridge loan. Every lender will often have their own approval guidelines that must be adhered to in order for the property owner to be approved for the bridge loan. And, these qualifications are generally more lenient than traditional home lenders in regards to debt to income ratios, meaning that these ratios can often be higher than with traditional mortgage loans.

The reason that there are different requirements associated with a bridge loan is that they are temporary and generally designed to help a property owner in moving from their current property into their new home. And, the funds from the bridge loan are generally applied to the new home loan in the event that they are not used during the transition period prior to closing on the new home.

The Benefits when Buying a Home

There are a number of benefits to the property buyer of bridge loans, including:

• It allows the home owner to place their property onto the market faster than normal and generally with less restrictions than if they did not have the additional financial cushion.

• A lot of bridge loans do not require monthly mortgage or loan payments, giving some financial assistance to the current property owner.

• The bridge loan can give the property owner some flexibility with restrictions on their home sale, allowing them to reject offers that are less than desirable without financial worry of carrying two mortgages in the event that their new property closes on time.

Disadvantages of Bridge Loans

While there are several advantages to using bridging loans when selling or buying homes, including:

• The fees associated with bridge loans are typically higher than traditional home loans and even home equity loans.

• Some home owners may not qualify for a bridge loan due to the lending qualifications

• Even though the bridge loan helps the home owner in covering mortgage costs throughout the transition time between properties, they must still pay for both loans and the interest that is accruing on the bridge loan.