Bridge loans are a valuable financing option for those facing challenges in securing traditional bank loans for property purchases. These short-term loans are designed to “bridge” the gap until more permanent financing can be secured, offering flexibility for borrowers in various real estate scenarios. Unlike traditional banks, bridge loan lenders often have leaner and less stringent qualification standards, primarily focusing on the property’s value as the qualifying factor. While private money lenders may evaluate the borrower’s financial strength and credit, they typically require less extensive financial documentation compared to traditional banks. However, it’s important to note that bridge lenders often offer lower loan-to-value ratios, typically in the 60% to 70% range, compared to traditional banks.
Pros:
- Provides a safety net if you sell your old home before buying a new one, avoiding the need to rent.
- Allows the purchase of a new home while selling the current one.
- Enables a down payment on a new home without using profits from selling the old one.
- Payments can be deferred or interest-only until the old home is sold, offering flexibility.
Cons:
- Short lifespans and high lender work result in relatively high-interest rates (around 8.5-10.5%).
- High closing costs and fees can increase overall costs.
- Lenders may use a variable prime rate, leading to potential interest rate increases.
- Risk of not selling the home within the loan term can create problems.
- Generally considered more expensive than traditional home equity loans.
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Shirin Rezania Ramos | 858.345.0685 | www.shirinramos.com | Compass, DRE 0203379
