Bridge loans – a short-term loan used until permanent financing is obtained or the property is paid for. Bridge loans are popular in certain types of real estate markets.This type of financing allows the user to meet current obligations by providing immediate cash flow. If a buyer has a lag between the purchase of one property and the sale of another property, he may turn to a bridge loan.
Typically, lenders only offer personal real estate bridge loans to borrowers with excellent credit ratings and low debt-to-income ratios. In this case the Bridge loan will roll the two mortgages together, giving the buyer more peace of mind as he waits to sale his house. Sometimes bridge loans are used to purchase a property while still waiting for credit and or the scores to be good enough to qualify for traditional financing later on.
Terms of Bridge Loans
Typical bridge loan terms of up to 12 months 2–4 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value.
Some bridge loans have longer terms, as long as 5yrs. R.E. flippers also use bridge loans to fund or rehab a property. RE flippers have used bridge loans to purchase Bank REO’s, then immediately put them back up for sale at a profit.
A loan may be closed, meaning it is available for a predetermined time frame, or open ended with no specific payment date but still have a pay off by date..
These type of loans known as a bridge loans have a short application fast decision and fast funding process . These loans have short terms, high interest rates & large fees. Borrowers accept these terms because they require fast, convenient access to funds and because they don’t have an adequate amount of credit tradelines on their credit report files to qualify for credit cards, business funding or personal loans. So they are willing to pay high interest rates because they know the loan is short term and plan to pay it off with low-interest, long-term financing quickly. Additionally, most bridge loans do not have repayment penalties.
To some it called the loan of “last resort”. Some people need credit repair so they have to resort to these. Hard money lenders also provide bridge loans which are backed by the value of the property, not the borrowers credit scores. Since the property is used as the protection against default by the borrower, hard money loans have lower loan-to-value ratios than other loans.
One things is for sure bridge loans can be used to prosper if used appropriately but at the same time they are not for everyone. if you decide to get a bride loan make sure the numbers add up.
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