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Bridge Loans vs Home Equity Loans vs HELOCs [2018]

Written by Posted On Thursday, 17 May 2018 13:04

Bridge Loans vs Home Equity Loans vs HELOCs

A homeowner who wants to purchase a new home generally will need to sell their current home to free up cash. This isn’t an ideal solution as it requires moving out of the current home to a temporary home and then moving again when the new home has been purchased. Having to move twice is expensive and inconvenient.

A homeowner in this situation typically has three options to choose from:

- Bridge loan

- Home equity line of credit (HELOC)

- Home equity loan

 

Bridge Loans

A bridge loan is short-term loan that allows homeowners to borrow against the equity in their current home and raise funds to purchase a new home. After the new home has been purchased and the homeowners move in, the previous home is sold which pays off the bridge loan. Bridge loans can be funded quickly by private money lenders (hard money lenders). Hard money lenders have far fewer requirements than institutional lenders such as banks and credit unions. Bridge loans typically have terms of 12 months of less.

 RELATED: What is a bridge loan? How does a bridge loan work?

Advantages of Bridge Loans

Bridge loans do not require income verification

The current federal government regulations require all lenders to verify a borrower’s income for owner occupied property. The lender must ensure that the borrower’s debt to income ratio is within the reasonable range. This is requirement is known as the “Ability to Repay”. Bridge loans with a term of 12 months or less are not required to follow the Ability to Repay rules. The sale of the existing house will satisfy as the loan repayment.

Bridge Loans for Seniors and Retirees – Obtaining financing for an owner occupied property without proving income is extremely beneficial for retirees and seniors. They often have limited income in retirement which makes loan qualification difficult or impossible. Bridge loans are often the only option for seniors who need financing to purchase a new primary residence.

Quick loan approvals and funding

Hard money bridge loans are often approved the same day the completed application is received by the lender. Owner occupied bridge loans take 2-3 weeks to fund because of the current federal regulations. Non-owner occupied investment property bridge loans can be funded in approximately 3-5 days if needed.

Hard money bridge loans against property currently on the market

Hard money bridge loan lenders are used to providing loans which are short term. Providing loans to borrowers that will be paid off quickly is the norm. Institutional lenders such as banks and credit unions typically will not provide a loan against a property which is currently listed for sale. Banks and other institutional lenders do not desire long-term loans which payoff within a year.

Flexibility of hard money bridge loans

Hard money residential bridge loan lenders have a great deal of flexibility with their lending and do not have strict lending criteria as institutional lenders. Hard money bridge loans are able to be secured against the current home, the home that is being purchased or even both homes. The borrower just needs to have enough equity in their property.

Bridge loans for borrowers with poor credit

Banks typically focus on credit scores and the income history of the borrower. Hard money lenders focus on the value of the property and equity the borrower has in the property. If the borrower has sufficient equity in the property it is likely that they can obtain a bridge loan.

 

Disadvantage of Bridge Loans

Higher interest rates and costs

Bridge loans from hard money lenders have higher interest rates and transaction costs than conventional bank loans. The higher costs are typically worth the fast funding and convenience.

Short-term use only

In order for the exemption from the Ability to Repay requirement, the bridge loan must have a term of 12 months of less. Purchasing a new home and selling the previous home in 12 months should enough time in most situations.

Difficult to obtain from institutional lenders

As previously stated, institutional lenders are generally not interested in short-term loans. If a borrower can secure a bridge loan through a bank, the overall cost will probably be lower but the loan approval and funding timeline will likely be significantly longer compared to a hard money lender.

 

Home Equity Lines of Credit (HELOC) and Home Equity Loans

HELOCs and home equity loans are types of loans that allow homeowners to borrow against the equity in their home. If the borrower has an existing mortgage they will likely keep this mortgage in place and have the new loan go in 2nd position. For homes without an existing mortgage, the equity loan will be in 1st position. Home equity lines and loans are offered by banks and credit unions. Loan terms of 10-20 years are common.

 

Advantage of HELOCs and Home Equity Loans

Lower rates and fees

HELOC and home equity loan interest rates and fees should be lower than hard money bridge loans. HELOCs and home equity loans interest rates are often 1-2 percent points higher than what is currently offered for conventional home mortgages. Some credit unions may offer these types of loans with little or no loan fees upfront.

Up to 70-80% combined loan to value ratios (CLTV)

HELOC and home equity loans lenders often offer up to a 70-80% combined loan to value ratio (CLTV). To determine the highest potential loan amount, multiply the highest CLTV percentage by the current value of the property. Then subtract the current balance of the existing mortgage to arrive at the potential loan amount.

 

Disadvantage of HELOCs and Home Equity Loans

Longer timelines for loan approval and funding

A bank or credit union’s loan application approval process may take a few weeks. After approval, funding for the HELOC may take up to 30-45 days. Institutional lenders are not known for funding loans quickly.

Good credit and income are required

Institutional lenders generally have strict credit score requirements. The current federal regulations for owner occupied property require borrowers to prove their income. The debt to income ratio of the borrower needs to be below a certain range. Recent issues on a borrower’s record such as bankruptcies, short sales, loan modifications or foreclosures will prevent the lender from approving the borrower’s loan request.

Loans not available for homes listed for sale

Institutional lenders generally will not approve loans for property that is currently on the market. A listed property means it will likely be sold soon, which tells the bank that a loan provided against the property will soon be paid off. Banks do not desire short-term loans. A borrower must plan ahead and obtain a home equity loan prior to listing it for sale.

 

Home Equity Loan vs. Home Equity Line of Credit (HELOC)

Borrowers usually prefer HELOCs over home equity loans as they are interest-only to begin with and interest is only paid on the amount of funds currently borrowed from the line. A home equity loan would require the borrower to make monthly payments on the full loan amount when the loan has been funded.

HELOCs are similar credit cards as there is a specific credit limit amount that can be borrowed against. The borrowed funds can be paid back and then borrowed again when needed. When a home equity loan is paid off the borrower must reapply for another loan if funds are needed.

 

Original article posted at North Coast Financial: Bridge Loan vs Home Equity Loan vs HELOC

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Jeff Hensel

North Coast Financial, Inc. is a California hard money lender with over 37 years of experience specializing in various types of hard money loans including probate and estate loans, investment and rental property loans, bridge loans, fix and flip/rehab loans, purchase loans, cash out and refinance loans and other hard money loans with California real estate as collateral.

https://www.northcoastfinancialinc.com/
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