Bridge Loan Lenders – 3 Reasons to Avoid Them [2020]

Written by Posted On Friday, 26 February 2021 09:18
3 Reasons to Avoid Bridge Loan Lenders 3 Reasons to Avoid Bridge Loan Lenders

A bridge loan is a specific type of financing that allows property owners to borrow against the equity within their existing property in order to purchase a new property. Bridge loan lenders are commonly private lenders (hard money lenders) who provide loans against real estate.

Common users of bridge loans include homeowners who want to purchase a new home. If a homeowner with significant equity in their current home wishes to purchase a new home but doesn’t have the necessary down payment or all cash offer for the purchase they may consider a bridge loan. Bridge loans are also available for residential investment property and commercial property.

The main requirement for obtaining a residential bridge loan is having sufficient equity in the owned property relative to the requested bridge loan amount. Another requirement is the borrower being financially strong enough to make the loan payments and pay all other property expenses such as taxes and insurance. The following is a step-by-step example of a residential bridge loan for a homeowner:

Residential Bridge Loan Process:

Step 1. Obtain bridge loan against existing home to raise funds for purchase

Step 2. Purchase new home

Step 3. Move from previous property to new property

Step 4. Sell previous property to pay off bridge loan

A bridge loan is often preferred to first selling the current home to raise cash to purchase the new home. Selling the current home requires the homeowner to move out of their home, find temporary housing and then move again once the new home is purchased.

3 Reasons to Avoid Bridge Loan Lenders

  1. While bridge loans may be convenient and necessary in specific situations, there are pros and cons of bridge loans and they aren't without disadvantages:

  2. 1. Bridge Loans are Short-Term Only

Bridge loans are very short-term loans and must be written for less than 12 months. The homeowner must purchase the new home and sell the previous home during this time period. Bridge loan lenders may be able to provide longer loan terms but an owner occupied loan term over 12 months will require the borrower to meet the Ability to Repay requirements.

  1. 2. Higher Interest Rates

Bridge loan lenders often charge higher bridge loan rates and fees compared to traditional mortgages from banks and credit unions. A Home Equity Line of Credit (HELOC) or Home Equity Line (HEL) will likely have lower interest rates but the HELOC lender may not be able to provide a large enough loan amount for the new home purchase.

  1. 3. Higher Transaction Costs

Bridge loan lenders charge a loan origination fee similar to other lenders. Because bridge loans are only available for short terms, the costs are spread over a shorter timeline which may make the loan appear to have higher transaction costs. Bridge loan borrowers will also be responsible for the standard real estate transaction costs such as title insurance, escrow, recording and notary fees.

The homeowner should consider whether or not the cost of the bridge loan origination fees and interest are worth the extra hassle and expense of having find temporary housing while waiting to sell the existing house and purchase the new house.

RELATED: What is a bridge loan?

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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.

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