Sometimes called a swing loan, bridge loans can help you finance a new house before selling your existing home. There are also small business bridge loans, but let’s start with bridge loans for home buying. They’re not easy to get since you’ll have two mortgages to pay off but it is beneficial if you qualify. You’ll need 20% equity in your current home, and they have terms of 12 months or less and high-interest rates and fees. Bridge loans tend to work best in areas where homes sell quickly. In effect, a bridge loan lets you borrow against your home’s equity so you can buy another without making a contingent offer, which sellers typically don’t like since it allows the buyer to back out in a hurry. A bridge loan can help if, for example, you’re in a situation where you want to move into a new home before selling the first home, or you need the equity from your first home to buy the new one. A bridge loan can give a buyer a boost in confidence when searching.
When applying to a lender, expect at least the same criteria as a regular home loan application. Lenders will want to give bridge loans to borrowers with good credit and repayment history. Don’t expect them to budge on the equity requirements. They will want you to have the 20% equity before considering approval.
You can get creative with bridge loans. If, for instance, your home value is $300,000 and you owe $200,000 and get a bridge loan for 80% or $240,000 you can use the proceeds to pay off your mortgage and still have $40,000 leftover after closing costs and fees to apply to your next homes down payment. Conversely, an 80% loan on your home’s equity, will give you $80,000 to apply to the future homes down payment. Another benefit is the lender may only require interest-only payments instead of a loan payment.
Careful when looking for a bridge loan though and that goes for small business bridge loans as well. Don’t just go online, check with your area lenders like banks or credit unions. But if local lenders say no, then, by all means, go online to a lender willing to take an application. Watch out for high-interest rates and watch out for hard money lenders who might charge even more interest in exchange for faster funding. An alternative is simply a home equity line of credit. This way, you can borrow against your home’s equity and use the proceeds as a down payment on another, lender willing, of course. In place of home equity loans, there’s also a regular personal loan or even borrow against your 401(k).
Bridge loans need not be used just for homes, however. If the lender is willing, you can use a bridge loan to stabilize your business cash flow during a slow season, for example. You can use a bridge loan for any number of reasons, but keep in mind the high-interest rate you’ll most likely pay and the short term. You should have a plan for borrowing since you don’t want the loan to go for too long. With creative financing, you could use small business bridge loans for any number of purposes. There are generally four types of bridge loans for business. There’s a business line of credit that can have a range of six months to three years. Short term loans five thousand up to a million — accounts receivable financing where you borrow up to 80% of your accounts receivable and a merchant cash advance where you borrow and repay with daily sales.