Buying a home: how to use a bridge loan

ying a home is the greatest milestones and among the huge financial decisions which many people make in their lives. This normally entails taking several measures which usually include securing your finances. This usually gets to be pretty challenging once you try purchasing a new house while selling the one which you currently own. That is where a bridge loan becomes something really substantial and critical from the financial point of view. 

What is a Bridge Loan?

The bridge loan is a short-term loan intended for temporary financing over the hump between selling your current home and buying a new one. A loan of such nature is majorly useful at a time when the sale of your present home does not time up well with buying a new one. For instance, imagine that you had just gotten your dream home probably without selling your property yet; this bridge loan will be in a position to give you money to buy the new home without having to wait for the sale of the house that you have.

The availability of bridge loans is usually from banks and mortgage lenders. They are collateralized also, with the present home of the borrower serving as security for the mortgagee. Such loans are supposed to be returned in a very short span of time, in fact just from months up to one year, which should work during transition periods for the homeowner.

How Does a Bridge Loan Work?

They can now put cash down or cash down on a new home while they are waiting to get their property sold. A bridge loan works in the following manner.

• Application and Approval: An individual applies for a bridge loan through any lender. The lender would consider the applicant's income, credit score, and existing home equity. Since an application for a bridge loan is often of a short-term nature, lenders usually have more lenient approval criteria concerning acceptance.
• How Much Can Be Borrowed: Actually, how much a person is able to get from a bridge loan depends on one thing: the equity an owner has in his house. Most time, lenders would be prepared to lend up to 80% of the house's value, factoring in any amount owed by him on a mortgage. 
• Rates and Fees: Higher,bridge loans are riskier compared to regular mortgages. That would generally depend on the lender and financial profile of the borrower. Apart from interest rates, bridge loans may also face significant origination fees, closing costs, and other expenses. Thus, knowing the real cost beforehand becomes paramount.
• Terms of Repayment: As short as projected, the bridge loan would be, its repayment period largely falls in the bracket of six months to one year. A few lenders present opportunities for making interest-only repayments within the loan term and allowing the due date of the principal to fall on the maturity date of the loan. It is often repaid with proceeds from your old home sale.
• Securing the New Home: Upon approval, the bridge loan is used to provide funds to purchase the new home. This proves very helpful in extremely competitive markets should one decide to lock in a property on the spot.
• Sell your existing home: Once you secure your new house, you may sell your old property. Its sale should cover the amount of bridge loan and pay the charged interest and fees.

Advantages of a Bridge Loan

Besides all of those headaches, too, are the many benefits associated with taking a bridge loan while the homeowner treads through the challenge of buying and selling at the same time. Some key benefits include:

• Serves as a Smooth Transition: The foremost benefit associated with a bridge loan is, no doubt, that one is able to buy a new house before selling the existing one. It really pays off if one has found the perfect property and does not want to waste their opportunity while selling their current house.
• Removes Contingencies: Most peoples' contracts to buy property do have a contingency wherein their home will not sell until they have purchased a new home. Generally speaking, contingent offers are nowhere near as attractive to sellers, and frankly, they put the uncertainty in the seller's lap. Here, a bridge loan lets you make a noncontingent offer; much more alluring to the seller, then, that would put your bid to the front of the pack.
• Gives You Time to Sell at the Right Price: In the event one needs to sell his home in order to finance the new purchase, chances are really high that you will sell for less than you might have liked. A bridge loan is a financial breathing room where you can hold on to it until the best possible offer comes along and makes the most of your current property.
• Freedom of Movement: The Bridge loan helps you to shift into your new home even before you have had the time to sell off your existing one. This area is particularly useful when one may be moving to another city either because of a job or something else and needs to settle down quickly into his new place.
• Simplifies Financing: Getting a bridge loan may-in some instances-make the entire financing process simpler because it consolidates your debt. 

Disadvantages of Using a Bridge Loan

Following are the disadvantages one can associate with the bridge loan:

• More Expensive: The interest and the charges on bridge loans are always higher than on conventional mortgages. For the very nature that it is not long term in use, hence the risk for the lender is also greater. This extra cost might come up to be fairly a lot and hence you must be pretty sure before considering whether a bridge loan would suit your needs.
• Risk of Unsold Home: One of the biggest risks with bridge loans is if one's current home fails to sell within set time estimates. Suppose that's your house, and it just takes a little more time than expected; you may soon find yourself right in the middle of staying in the deal, paying two mortgages, and worse, reducing your selling price just to sell earlier.
• Qualification Issues: While the qualification for a bridge loan is easier due to slack approval criteria, it does not mean you'll actually get the loan. Any lender considers your financial position in the light of the debt-to-income ratio, takes a sneak peek at your credit score, and goes on to have a look at your overall financial stability. Failure to impress the lender in such matters would, therefore, be failure in qualifying for a bridge loan.
• Brief Repayment Duration: The nature of bridge loans is temporary; these are usually sanctioned for six months to one year with the payback time period. In case your house doesn't get sold within this period due to whatever reason, you will fall into immense financial pressure to either return the loan amount or seek other forms of financing.
• Possible overleveraging: In the case of a bridge loan, you are adding more leverage to your financial profile. Sometimes one would realize that the added leverage may make a person over-leveraged in which case the total financial liability would outsmart one's paying capacity and may risk the default of a loan.

How to Decide if You Should Take a Bridge Loan

Decisions on bridge loans as a means of financing must be made in conjunction with the current financial situation, the status of the housing market, and generally what one wants to achieve. Following are some factors to consider:

• Assess financial stability: Be honest with yourself over this. Is your income dependable? Is your credit good? Is there enough in the bank to cover those little surprises that always seem to pop up? A bridge loan is a risk, and you really should make sure you are financially stable enough for it.
• State of the Housing Market: Get a realtor to explain what is happening currently in the housing market in your area. If the houses are moving very quickly at this time, you might consider doing a bridge loan as you will likely be able to sell your current house within the time frame that the loan is due.
• In that case, it would be more than a little hard to sell your house in a slow market—and that, too, might lead you toward more risk with a bridge loan.
• Consider the Costs: A bridge loan requires paying interest rates and fees; moreover, there is always some amount which goes towards covering closing costs for which you may want to consider much greater detail. Next, weigh those costs against another home equity loan or line of credit to find out which will be cost-effective.
• Contingency Planning: What if your house does not sell as quickly as you may have hoped? Have you planned alternatives, such as renting your present home, or extending the bridge loan repayment period? Obviously, one has to be prepared with various types of scenarios, just in case any of them come into play.
• Seek the Advice of a Financial Advisor on a Professional Level: Because of the sophistication and risks associated with the bridge loan, they are discussions that ought to be taken with the input of a professional in financing or mortgaging. The financial advisor helps in weighing up the available options, cost benefit valuation, and determining whether the bridge loan is good for financial goals.

Alternatives to Bridge Loans

If any of these sound not right for your case, then a number of other alternatives are available. Following are some of the most important ones among them: 

• HELOC/Home Equity Loan: This is the first alternative to the bridge loan and mainly considered when there is huge equity that one may have in your already existing home. Take a home equity loan or line of credit. These are going to be way lower in rate than bridge loans, and the money can be utilized against the down payment of the next property.
• Of course, these do require that you have enough equity in your property and may take a little longer to get.
• Contingency Offer: This is a bit weaker than a non-contingent offer, but an offer can still be made with a contingency clause contained within. In that case, your purchase would be contingent upon selling your existing home. That wouldn't require a bridge loan, but the offer would be weaker than that-which means you'd be weakening your chance of success in a competitive market.
• Sell First, Then Buy: In case one does not have an emergency for shifting, he can first sell the dwelling and later buy a new one. This way does not involve a bridge loan and also helps in reducing the financial risks. However, this way will be much inconvenient for those who fail to find new dwellings and have to stay somewhere else until that time.
• Rent Out Your Present House: In case one is not in a position to sell the present house, he may try renting out the house for some time. 

Conclusion 

A bridge loan will be of great help if one is purchasing the house especially when one needs the factor of time or is purchasing in a very competitive market. It means that it is that kind of loan that will enable one to buy another house before the sale of the old residence is made, making the transition smooth and fast. Yet, they also contain high interest rates and fees, so the costs have to be weighed against the benefits. This is, therefore, quite a conservative analysis that should be done with respect to your financial situation with other alternative funding choices even with a financial advisor, so that this temporary financing solution is in line with long-term ideas. Knowing how to work with a bridge loan will ease your home buying process and at the same time make it strategic.