Are you familiar with the concept of bridge financing? These interim loans are usually taken out by homebuyers to finance the purchase of a new home prior to selling the existing one.
This alternative provides fast financing and prevents homeowners from missing one-time offers. Nowadays, there are numerous mortgage broker companies, like https://www.geoffleemortgage.com/mortgage-services/bridge-financing/, assisting clients with bridge financing.
Here is everything you need to know about interim loans.
What is a bridge loan?
Bridge financing refers to taking up a short-term loan for the purpose of performing a real estate transaction. This type of financing is often used by homeowners who wish to purchase a new house without having sold their existing property yet, even though they rely on the funds from the sale to finance the purchase of their new home.
The highest interim loan amount homeowners can borrow is approximately eighty percent of the combined value of their existing and future homes, but it usually varies across lenders. If your existing house is worth $200,000, while the property you wish to purchase is $300,000, the maximum borrowed sum would be $400,000.
This form of temporary financing is attractive to many homeowners unable to provide immediate finances for the purchase of a new house/apartment. Nevertheless, the interest rates and fees of bridge loans are much costlier in comparison with a traditional mortgage. These rates generally range between 3.25 % and 10.5 %, based on the creditworthiness of borrowers and the borrowed sum. Click here to gain better insight into bridge financing.
Apart from paying high-interest rates, borrowers are also obliged to pay high administrative fees and closing costs. The rates of these fees are varying, depending on the types of costs, which usually include an appraisal fee, notary fee, administration fee, escrow fee, title policy costs, etc.
For instance, the administration fee might be as high as 8.5%, while the appraisal cost may be 4.75%. Consequently, bridge loan costs on a sum of $10,000 might be approximately $2,000. The repayment period for interim financing is no longer than twelve months. Most borrowers pay these credits off with the money they’ve collected from the sale of their old homes. The structure of bridge loans differs but, usually, there’s a balloon payment in the end.
The eligibility criteria for bridge loans are similar to those of traditional mortgages; only the application procedure tends to move a lot faster. Consequently, every individual considered a good mortgage candidate by lenders will also be eligible for interim financing.
The majority of moneylenders tend to check the credit history, credit scores, debt-to-income ratio, and loan to value when reviewing the applications of candidates. Applicants are required to have plenty of equity in their existing homes so as to qualify.
Afterward, they move on to checking the debt-to-income ratio of applicants by comparing their current debts to their monthly income. Candidates with low debt-to-income ratios have lower chances of qualifying.
Ultimately, lenders check the FICO scores of applicants, which should be strong in order to qualify. The better your credit score, the higher the chance of getting approved and receiving lower interest rates.
When to use bridge financing?
Despite the high-interest rates and fees, interim loans are considered a wise idea in a couple of scenarios. For instance, these are a good idea when choosing a new home in a housing market where houses are sold quickly. The following link, https://www.thebalance.com/what-are-bridge-loans-1798410, explains the benefits of bridge loans for homebuyers.
Moreover, interim financing is the best alternative for homebuyers who cannot cover the down payment on the new home without selling their existing one. The same goes for individuals who want to make a purchase before selling the home they own.
Additionally, this alternative is the right choice for removing contingencies from your offer. Also, the application procedure is less time-consuming and demanding.
Nevertheless, homebuyers should be aware of the risk of not selling their current home by the end of the repayment period. See this page to learn whether a bridge loan is right for you.
In the event of interim financing, a mortgage broker can help you purchase the home you wish for!