A bridge loan is a short-term loan a borrower may use while a more long-term financing contract is finalized. Bridge loans are common in real estate when someone needs to buy a new house before their existing house has sold.
These short term loans typically come with a higher interest rate. Additionally, many banks will require some sort of collateral from the borrower before the loan is issued.
We’ll cover everything you need to know about bridge loans below.
Although bridge loans may also apply to the business world, they are more commonly associated with real estate transactions. As the name suggests, these loans are designed to bridge the gap, and fill the cash constraints, someone may feel when they are both buying and selling a home at the same time.
Someone wishing to get a bridge loan first needs to find a lender who offers this financing program. The first place to check would be with your existing mortgage company.
Once you find a lender who offers bridge loan financing options, it’s time to get all the paperwork needed for the lender. Lenders will want to know the details of your existing property. For example, lenders will want to know how much you owe on your existing property, when you plan on selling it, and what price you plan on selling it for. Additionally, they’ll want to know the details on the property you’re looking to purchase.
Lenders will of course pull an up to date credit report, and will require you to provide them with proof of income. With all of this information, a lender can successfully calculate the financial ratios they use to determine if you qualify for a bridge loan, and how much loan you qualify for.
Securing financing via a bridge loan doesn’t take too long! Generally speaking, you should be able to have your loan finalized within 30 days. Hard money lenders can typically finalize a loan even quicker
We wrote a whole blog explaining ways to speed up the mortgage process, read it here.
Bridge loans can be more challenging to qualify for since you typically need to have a good to excellent credit score (740+ credit score) to qualify - but all lenders have their own unique qualifications. One of the most important variables a bank will review during your application process is your debt to income ratio.
This variable is increasingly more important on bridge loans as the borrower will be paying for two mortgages at the same time.
Banks want to be fully confident adding another mortgage payment to the borrower will not cause them to default on any existing loans. One's income needs to be high enough to provide them with the financial breathing room and stability through the double financing period.
Below is a comparison table of bridge loan qualifiers vs a traditional home loan.
Loan TypeCredit Score NeededDTI (Debt-to-Income) PercentageInterest RateBridge LoanGood to excellent - 740+ credit score is ideal, but all lenders can have different requirements.Because a person taking out a bridge loan is considered a temporary loan until their home sells, many bridge loan lenders will allow applicants with a DTI of 50% or less to be considered.Rates vary by applicants and timing, but are usually higher than the current mortgage rate.
Applicants can expect rates of 8.5-10.5% or more.MortgageVarying credit score is needed depending on your loan type.
Some mortgage loans can accept applicants in the 580 range while most conventional loan lenders prefer a credit score of 620 or higher.Depending on their mortgage you apply for, the DTI requirement can change by several percentage points.
Preferred DTI is around 43%, but some lenders can provide financing for applicants with DTI up to 50%Mortgage rates vary by time and applicant.
The current mortgage rate is between 4.9% - 6.5%+
Bridge loans provide the borrower with a great deal of convenience. In the finance or lending world, convenience comes at a premium. The interest rate on a bridge loan is directionally aligned with the interest rate on conventional lending, however, bridge loans will have a higher interest rate by a few percentage points.
The higher interest rate makes sense from a banking perspective. Banks need to take on risk to issue these loans, and they are short term in nature. In order for a bank to make as much money back as possible, and justify the risk in lending, they simply need to charge a higher interest rate
What's the difference between an interest rate and APR? Don't know? Read our blog all about it here.
The actual borrowing amount may vary between different lenders, however, as a rule of thumb most bridge loans will allow one to borrow up to 80% of the home’s value.
Bridge loans are certainly a powerful tool made available to the real estate industry. Now with a better understanding of what this tool is and how it works, let’s dive into some pros and cons.
Many borrowers appreciate a bridge loan for the following reasons.
Bridge loans provide individuals with flexibility. They can buy a new house before their existing house sells. This not only adds convenience, it can also help someone move into their dream home. In a competitive real estate market, that dream home may not be available for long.
Some bridge loans do not require the monthly payment for a few months. If you happen to secure lending from a lender who doesn’t require immediate monthly payments, you’re in luck. You’ll be able to buy the house you want without the immediate financial pressure two loans could have on your finances.
Generally speaking, securing financing via a bridge loan can be done in a shorter period of time. Instead of waiting on a HELOC, or other financing options, lenders who issue bridge loans are well aware the borrower needs the loan now and plans accordingly. This urgency comes at a premium, which we’ll discuss below.
There are three major drawbacks of a bridge loan.
You may be wondering, are bridge loans a good idea? Unfortunately the answer isn’t yes or no. A bridge loan is a great financial tool to have in your tool chest, but it certainly comes at an increased cost and risk. If you need the money quickly to move into your dream house, a bridge loan may be the only option.
However, a bridge loan is not the only option when it comes to buying a new home while you wait on your existing home to sell.
Is there an alternative to a bridge loan? Absolutely. Instead of choosing a bridge loan, many people choose to go with a home equity line of credit, a home equity loan, or even a 80-10-10 loan.
A home equity line of credit, also known as a HELOC, is very similar to a credit card in how they function. A borrower is approved for a specific amount or credit limit, but the borrower does not need to use the full amount. A borrower will only pay interest on the debt they used, and they can draw against their credit line in various increments.
Another common option would be a home equity loan. This is very similar to a home equity line of credit, however, the money is given in one lump sum. Some of the major advantages are; there are lower closing costs associated with home equity loans. Additionally, home equity loans have lower interest rates and even offer extended repayment terms.
A 80-10-10 loan option is when someone has enough cash to cover a 10% down payment. Instead of financing 90% of the home in one mortgage, the buyer will choose to take out two mortgages. The first mortgage is for 80% of the home value, and the second mortgage is for 10%. Therefore, the buyer is able to avoid paying private mortgage insurance, and can use this option if they are unable to make a larger down payment as their existing home hasn’t sold yet.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
A bridge loan is a financial instrument that provides financing to individuals as they secure a longer term financing option. In the real estate world, these loans are common when someone is selling their existing house, and buying a new house, simultaneously.
Bridge loans provide the borrower with money in as little as a few days, resulting in tremendous flexibility. This flexibility comes at a premium, and one should expect to pay a high closing cost, and interest rate, on this short term loan.
There are other financing options available in the marketplace. Home equity lines of credit, home equity loans, and even 80-10-10 loans should all be considered before deciding if a bridge loan is the right option.
Research indicates that 58% of homeowners in HOA communities and single-family homes pay an average monthly fee of $250. Despite this substantial number, homeowners lack adequate information about HOA fees and why they have to pay for them in the first place.
Typically, properties in homeowners' association communities come with the requirement that the homeowners will pay a certain amount of money per month. These costs are generally used to provide additional amenities like gym equipment, swimming pools, and security.
All in all, HOA fees are a way of ensuring that both current and future homeowners can enjoy all of the features and components of the neighborhood for years. Let's take a deeper dive into what HOA fees are and how they affect your finances.
Do you know what the differences between a COA, HOA, and POA are? Read all about them here.
An HOA fee is the amount of money homeowners are required to pay their association. These funds go directly to a management company that schedules maintenance and improvement within the community.
HOA fees are usually levied on condominium owners. However, they may also be applicable to homeowners of single-family homes. Let's take a closer look at what HOA fees are.
HOA fees are used to pay expenses related to the upkeep of a condominium community’s common areas. Communities often include lobbies, swimming pools, patios, and elevators, among other features. Plus, there are usually services offered as amenities, like landscaping or standard utilities such as water, sewage, and garbage disposal.
The homeowner’s association may even impose specific assessments intended to take care of major repairs like roofing or elevator replacement. At the same time, HOA fees that apply to single-family homes in various neighborhoods are put towards neighborhood amenities such as clubhouses, tennis courts, or parks
Depending on the association, HOA fees may vary drastically. However, some experts believe that an accurate range of HOA fees is anywhere from $100 to $700 per month. Keep in mind that the exact costs of your homeowner’s association fees will be dependent on what your HOA provides you.
Oftentimes the more services and amenities in your community, the higher your HOA fees will be. Moreover, you may have to deal with even higher costs if the reserve funds are not managed adequately.
HOA dues are not deductible for your personal residence. But keep in mind that if you rent out your property and pay on-time HOA fees, you can reap the benefits of a tax break.
Moreover, a home office deduction may also be possible if you work from your place of residence. Reach out to a tax accountant to learn more about your tax break options.
These dues cover many amenities and services, including but not limited to the following:
Before purchasing a home that requires HOA fees, you should first thoroughly understand these payment processes. Let's discuss the different ways HOA dues can affect your monthly finances.
Before you purchase a home that is part of an HOA, you and your lender need to spend some time evaluating the property's monthly HOA costs. This way, you can determine whether you can afford the dues in addition to your mortgage.
One major caveat of HOA fees is that they can change over time. The fees can spike up when home projects require additional financing or as the result of automatic inflation adjustments. In some cases, housing payments can become unaffordable for homeowners strictly because of the HOA fees, so make sure you ask your lender about the HOA's history of increasing fees.
HOA fees cover routine costs as well as occasional expenses. However, in some cases, critical projects and emergency repairs will require unexpected out-of-pocket fees for homeowners. In these cases, homeowners will have to pay an additional assessment which can cost several hundreds or thousands of dollars.
If you live in a multi-unit property, HOA fees go towards a premium insurance policy that doesn't cover your personal property, your unit's interior, the home you reside in, damage originating from your unit, or your personal liability.
Discuss the risks associated with an HOA with your insurance provider to find out which policy will match your needs the best. Make sure you fully understand the prices of the policy before you purchase an HOA property to ensure that you are aware of its future costs.
Purchasing a home in an HOA community means you've agreed to pay these monthly fees. If you fail to pay the costs, you'll owe money to your HOA. Plus, your HOA has the power to send past-due accounts to collections.
They may even put a lien on your home or initiate a foreclosure. From there, collection accounts and public records will start appearing on your credit reports. These negative marks on your credit reports will make it harder for you to secure other loans or find affordable housing in the future.
HOA fees cover the costs of various repairs and renovations in your neighborhood. But the fact of the matter is that you may not need everything that you pay fees for.
That is the major downside of living in a shared space. For instance, you may not ever use the pool or the rooftop patio but you'll still have to help pay for them anyway.
When you purchase a property that boasts as an HOA community, you'll have to pay dues for every day you live there. On the brighter side, you only have to pay a prorated amount once you’ve sold your home
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
If homeowners fail to pay the requisitory assessments, the homeowner’s association can collect the dues with the help of various conventional collection processes. From sending demand letters and making collection calls, to initiating foreclosures and filing a civil suit, homeowner’s associations will pursue legal action against homeowners who don’t pay their HOA fees.
Homeowner’s association fees refer to monthly dues that homeowner’s associations collect. Typically, HOA fees are used to pay for costs of repairs, maintenance, and other amenities in the community.
Overall, it is important to understand HOA fees and what these fees entail prior to purchasing a property. To make sure this property’s community is in your best interest, further investigate what the community’s amenities are and how these payments contribute to your neighborhood.
When you buy a house and start making mortgage payments, your payment consists of four different components, known by the acronym PITI, which refers to Principal, Interest, Taxes, and Insurance. The insurance component can include PMI (private mortgage insurance) and homeowners insurance. Each of these concepts would take an entire article to explain, but we’ll be focusing on homeowners insurance in this blog post. If you’ve bought a house or are preparing to buy one, this article will provide a thorough overview of what homeowners insurance is, why you have to have it, what it covers, and ways to bring the costs associated with it down.
What is homeowners insurance, and why is it necessary that you pay for it? Essentially, homeowners insurance protects you if your home or possessions in the house are put in jeopardy by a natural disaster, robbery, or some other unexpected event. In addition, homeowners insurance protects lenders by allowing you to continue to make mortgage payments in the event of a crisis and protecting the property for which they have a financial interest in until the mortgage is satisfied. In most cases, proof of homeowners insurance is a mandatory requirement from mortgage companies.
Homeowners insurance includes property insurance, which protects your actual home and property in the event of a fire, theft, or other unexpected events, but it also includes liability insurance. Liability insurance protects you legally if someone who’s not on your policy is affected by your property or while on your land. Examples of this could include someone falling and getting hurt on your property or a tree planted on your land falling on someone else’s house—though the liability in both of these examples would depend on the exact details of the event and is determined on a case by case analysis. Because home insurance includes two types of insurance bundled together, it’s known as multi-line.
Not all homeowners insurance policies look the same. Depending on your situation and needs, your policy could look completely different from someone else’s. Here, we’ll go over several different types you might encounter and what they cover.
Homeowners insurance is just as much a protection for you as it is for your lender, so it’s natural to want to know what exactly it covers. While the exact coverage will depend on your policy, there are some common things that you can expect to see home insurance guarding you against.
First, homeowners insurance, depending on the policy, may protect your house, inside and out, from disasters like fires and smoke damage, explosions, falling trees, aircraft damage, and even destruction from a burst pipe. If you neglect the upkeep of your home and experience damage due to that, homeowners insurance may find you at fault and this can affect your coverage. Homeowners insurance also generally covers not just you but the property in your house. This can be comforting if you worry about the possibility of a burglary. Depending on your policy, homeowners insurance may also cover damages for injury to people on your property in the event of an accident. Finally, if a disaster happens to displace you temporarily, your insurance might also cover day-to-day expenses, including lodging and food, within reason.
We’ve discussed what home insurance covers in brief, but let’s break it down even further so you can understand exactly what to expect.
The first section in your policy is all about you—your house, your possessions, and your well being when disaster strikes.
Dwelling refers to the actual physical makeup of your home. Insurance companies will want to consider how expensive it would be to repair or entirely rebuild your residence in the event of a disaster.
The items in your house can carry substantial value, which is why many homeowners insurance policies cover them as well. For people with especially high-value items, such as jewelry or rare collector items that they own and treasure, extra coverage might be a good idea.
As we discussed before, some disasters can drive you out of your home for an extended period. Luckily you won’t have to pay for lodging costs during this time if you have the right coverage.
Many potential accidents could happen on your property or as a result of something on your property: your pet could harm someone, a tree branch could break off and damage your neighbor’s car, and the list goes on. The liability section exists to safeguard you from the financial burden of any repairs or payments that arise because of such events.
Our Mortgage Learning Center features blogs on a wide range of mortgage and refinancing topics.
When you’re ready to buy homeowners insurance, do your research. Determine what type of insurance you need, your home-rebuilding price, the items in your home that need to be insured and how you want them to be covered, and more. Consult with an insurance agent or a realtor as needed. If you live in a place that’s likely to flood or have earthquakes, you may want to ask about buying additional insurance just for this eventuality.
Before binding yourself on a policy, be sure to compare prices from several different companies to ensure you’re getting the best homeowners insurance premiums and coverage.
Your situation isn’t the same as your neighbor’s, so you likely won’t pay the same as they do on their homeowners insurance. If you are wondering, “How much is homeowners insurance going to cost me?” know that insurance businesses consider several details when calculating how much to charge you. Some factors have to do with the home itself, while others take into account your lifestyle choices. Here are some of the main factors that may go into how much your homeowners insurance premium rates:
Most people want to cut costs wherever they can, especially when you’re dealing with the already pricy business of buying a house. Some ways that you can keep your premiums as low as possible without skimping on the quality of your insurance include:
Overall, while homeowners insurance may be a requirement, it’s also a smart thing to purchase to protect you and your property from unexpected events that can cause damage. If you’re looking for the right homeowners insurance company to safeguard your next real estate investment, an insurance agent can help you explore policies and customize them for your needs.
*Does not apply to third party fees and closing costs.
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