Bridge loans can be a powerful tool for homebuyers, especially those looking to sell a property and buy a new one with ease. They are also perfect for investors or retired owners looking to downsize or be closer to family and friends.
Mortgage expert Arjun Dhingra recently covered the topic on an episode of The Mortgage Reports podcast, with help from Sofia Nadjibi, president of Golden Gate Lending Group.
Are you a homeowner looking for your next home or investment? Here’s what the pair talked about – and how bridging loans can help you reach your goals.
Listen to Arjun on The Mortgage Reports Podcast!
What is a bridging loan?
A bridge loan is exactly what it sounds like: a bridge between one property and the next.
Bridge loans are equity-based mortgage loans. Although lenders look at your income and other debts, that is not how they qualify you for these mortgages. Instead, they consider the property itself, namely its current market value and the equity you hold. Typically, bridging loans require you to own at least 50% equity to qualify.
Here’s how Nadjibi explained it on the podcast: “When someone owns a property that has equity, you want to take that equity and move it to another property. It’s a bridge loan.
The benefits of bridging loans
The big advantage of a bridging loan, especially in today’s market, is that it allows you to buy a new property without selling an existing home first.
It can help you avoid the contingencies of selling a home and, perhaps more importantly, give you more money to spend on the new home. Then you can switch to a more traditional mortgage later.
Just note that bridge loans have significantly higher interest rates than mortgages. So if you’re counting on one to buy your next home, you’ll want to have a plan to switch to a lower rate mortgage within a few months.
Bridging Loans in Today’s Housing Market
According to Nadjibi, bridging loans have become very popular since the start of the pandemic.
“I think the biggest thing we’ve seen during the pandemic is that so many people have changed their lifestyles,” Nadjibi said. “They looked at their house in a very different way. They viewed a home as a place where they wanted to gather their family, cook, and enjoy the backyard. They needed that extra office space to be able to make Zoom calls and for the kids to go to school, so they needed more space.
As a result, more existing owners have started looking for new properties. Some have started to consider larger homes with additional space or bedrooms, while others have considered different locations, thanks – at least in part – to the flexibility of remote working.
But the traditional challenges of selling and buying simultaneously remained. And with incredibly fierce competition, it was essential to act quickly. Bridge loans have helped solve both of these problems simultaneously.
Bridge loans can compete with cash offers
“We were able to help a lot of people, especially families, who stepped out of their space,” Nadjibi said. “With a bridging loan, as long as they had the equity in the house they were living in, we were able to support them without moving. They could stay in the comfort of their home, get pre-approved for the bridging loan, and do their shopping. And once that good house arrived, they could make a cash offer, with no contingencies.
That last part is critical, Dhingra said.
“A lot of buyers have been frustrated over the last decade competing with cash offers. They say, ‘Well, I’m overpriced because there’s always someone coming with money, or another cash offer beat me,'” Dhingra said. “Bridge loans can work just as well as a cash offer in these situations.”
Who should use a bridging loan?
According to Nadjibi, three types of buyers can really benefit from a bridging loan: investors, retirees and existing owners.
Let’s take a look at the benefits for all three groups:
- Investors: Bridge loans allow investors to use the equity in their existing investment properties to buy new ones. They also allow them to act quickly in a hot market and provide them with cash offers to stay competitive.
- Retired: Since retirees often have limited income, traditional mortgages can be more difficult to obtain. Equity-based bridge loans can be a good alternative, especially if they’ve been living in their current home for a while and have plenty of equity.
- Current owners: Bridge loans make it easy for existing homeowners to shop around. They can use the loan to submit unconditional cash offers as they wish and then worry about selling their existing property later – after they close and move into the new home
“What’s great is that they don’t have to change anything in their usual life,” Nadjibi said. “So they don’t have to try to move into a short-term rental. They can stay in the comfort of their home, get approved, and then be ready to search because they’re approved for the bridging loan.
How to get a bridging loan
The bridging loan process is quick and painless, according to Nadjibi. Borrowers can be fully approved and ready to start shopping in just days, and loans can often be closed in just 17 days.
Here’s what the bridging loan process looks like at Nadjibi’s company:
- First visit: You’ll talk to a loan officer about your goals and they’ll help you design a lending strategy that’s right for your unique situation.
- Application and documentation: You will complete a secure application and submit all required documents. Bridge loans generally require less documentation than traditional mortgages, although you will still need it. You can expect to need many property-related documents (mortgage statements, insurance policies, etc.)
- Subscription and approval: Your request is sent to underwriting and usually approved within 24 hours. You can then start bidding on the properties as you wish
- Closing: Once you have found accommodation, made an offer and concluded a contract, your loan can be finalized. It can take as little as 17 days from start to finish
Once you’ve moved into the house and sold the previous one, you’ll usually want to restructure the loan and switch to a more traditional mortgage. (This will lower your rate and make monthly payments more affordable).
According to Nadjibi, the typical borrower takes out a new loan within about 45 days.
“The goal is to kind of get into the new ownership and get out of that bridging loan as quickly as possible,” she says.
Find out more about bridging loans
If you want to learn more about bridge loans or are considering using one for your next home purchase, contact a mortgage expert today. They can help you make the right decision for your goals.
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