January 31, 2019
REI: What is a “Bridge Loan?”
It is uncommon for bridge loans to be used in the residential real estate industry, especially in the years since the housing crisis, but they do appear from time to time. Generally, this occurs when a buyer has arranged to close on one property, but the property they own has yet to get far enough along in the purchase process to provide the purchase funds at closing. If this buyer has excellent credit and a very low DTI (Debt-to-Income) Ratio, as well as either a good amount of equity built up on the home they are selling or a good deal of cash on hand, a lender may choose to extend a bridge loan to help make up for the lack of sale-based equity funds available to make the purchase of the new home immediately.
What are the characteristics of a bridge loan? The mortgages of two homes are generally rolled into a single loan, usually only amounting to 80% of the combined value of the two properties. As you may imagine, these loans are considered riskier in kind than traditional loans, no matter to whom they are lent–and as the need for them is more immediate than a typical loan, meaning the term of the loan will be (ideally) quite short, lenders are likely to offer them only at a much higher interest rate than typical, and with origination fees that dwarf those found in the typical mortgage loan. The immediate nature of bridge loans also make the application, approval and funding processes much shorter than for typical real estate loans. Luckily, they do not generally get loaded with prepayment penalties (since they are designed for quick resolution at any rate—usually only a few months, though they may stretch to as long as a year).
Generally if a buyer is looking to get a bridge loan, it’s a good idea to have a solid concept of the financial situation of the purchaser of their own home. Should that financing fall through, the bridge loan “collapses.” That would leave one owning two homes at once, with a high-interest-rate bridge loan and the attendant pressure to sell the initial property as quickly as possible. This can cause a seller to take drastic measures like lowering the price at which they are selling their old home, to get it off the market at the earliest possible moment, resulting in lower sale earnings.
Whether you get a bridge loan or not, if you’re looking for a closing attorney in Jacksonville, Florida; Rockport, Massachusetts; or Cumberland, Rhode Island, contact us to see how we can help. Topouzis & Associates, P.C., performs title searches and provides title insurance backed by multiple underwriters. We’re staffed by residential real estate specialists and ready to help avoid costly delays and to streamline residential transactions.