For those who don’t know, bridging loans are short-term loans where a property owner borrows against the equity in their present(own) real estate. The intention is to purchase a new real estate property. After securing the new real estate, the old one is sold to pay off the bridge loan.
These types of loans are beneficial for homeowners and real estate investors with sufficient equity within their property. But, before you apply for a bridge loan, you must know about the benefits and what differentiates this loan from regular loans.
Benefits of Bridge loan
Avoid Moving Twice
If the home buyers get a residential bridge loan, they have to move only once. Once the loan is funded, the homeowner would have to purchase the new home. After the purchase, the owner moves to the new house and sells the old one.
If the homeowner didn’t take the bridge loan and does the traditional way of selling and buying the house, he needs to move to a new rented house until the sale happens. And after the sales, he has to move to the newly purchased home again from the rented one. Getting a bridge loan will reduce the inconvenience of moving in and out of houses many times.
Access to Equity Without Selling
The method of borrowing against the equity in an existing property to purchase new property is the speciality of bridge loans.
A bridge loan lender provides the loan in less time than any other loan you can get for real estate investment.
No Requirement of Income Documentation
The traditional lending of loans requires the buyer to show the lender the income details. This documentation is to prove that the buyer can pay back the loan borrowed. If, in any case, the income documentation is not done, the loan will be denied. Many are without an income, like retirees, self-employed, and many other categories won’t be able to submit the required documents.
The bridge loan doesn’t require the income documents, and it just needs to get the details of the property you are selling and the estimated value.
How Are Bridge Loans Different From Regular Loans?
Apart from the speed of loan lending, short-term loans tend to have higher interest rates. The interest rates are slightly higher for the short-term loan for small and medium businesses than the standard loans. But, the business owners prefer this loan for its ease of availability and faster repayment policy. It works in favour of both parties.
Transaction costs are different from traditional loans but reasonable for the borrower. The borrowers have to pay for standard real estate transaction fees, including title insurance, notary, escrow and recording fees. Then there’s no delay in the approval of the loan from the lender.
You must ensure to know all the processes and policies of the lenders before you sign up for the deal. A bridge loan is usually suitable for real estate deals but always moves forward with a total understanding of the situation.
