Bridge Loans for Home Purchase: Are They a Good Idea?

Imagine yourself in the middle of your next rehab project. Say you’ve just finished placing a new carpet in the living room. Suddenly, you realize that you’ve run out of funds.

You want to finish your project, but you can’t with what you have left. Yet, no one’s going to buy this home in its unfinished state. You wonder if you should just cut your losses, abandon the property, and move on.

However, there’s a better solution: bridge funds for home purchase. This type of bridge loan can help you finish your rehab, get it sold, and still leave you with some profits. Read this guide to learn if a bridge loan is the solution for you.

Bridge loans are used by professional real estate investors to purchase, rehab and sometimes refinance a current flip in order to finish a project and make a profit.

Bridge Loans in a Nutshell

bridge loan is a loan whose lending period is relatively short. Typically between 12 and 24 months. You need to pay off a bridge loan before the loan matures. You do this by refinancing or selling the property once you’ve completed the upgrades.

Usually, you can be approved for one and receive the funds from it quickly. When you need money fast and expect to receive money fast, a bridge loan can be a great asset.

However, this type of loan comes with many, many risks. As such, you should only use this type of loan as a last resort. Thus is the main reason why bridge loans should be used for investment purchase and not home refinancing.

You can find out more about appropriate situations to use this type of loan below.

Bridge Loans For Home Purchase

This type of loan can help you finish up your rehab project. Once you’re finished, you can sell the rehabilitated home. Then, you can use a portion of your profits to pay the loan back.

Bridge Home Finance Process

Now you probably want an explanation of how the entire process works. At its most basic level, it can be described in three steps.

Step #1: You Apply For A Bridge Loan

The application for this type of loan has certain requirements. There are the basic documents and information that you need for every loan. Then you have to figure out how much capital you want and can receive.

Usually, you can receive up to about 80% of your home equity. This isn’t the total value of your rehab project. It’s how much you’ve already paid through your mortgage or other source for it.

After this, you need to reach an agreement with the lender on the exact form that your loan will take. There are a few options such as monthly options or paying it all in a lump sum.

When you think you’ve reached an agreement with the lender, make sure that you read the terms carefully. You want to be able to handle the terms that you’ve agreed to.

Step #2: You Receive The Money

Say that your project’s total value is $200k and you’ve paid off $100k.  This means that you can receive up to $80k to help you finish up the rennovations.

Beyond this, you must make a down payment. Consider this as a typical rate of 20% of the aforementioned loan. This means that you’ll have to pay $16k to take out the loan.

Then you’ll receive the money. You should now have about 64k total to use for your project.

Step #3: You Sell Your Project

Once you sell your project, you can pay back most of the loan. If all goes well with the sale, you should still receive significant profits.

However, on top of this payment, you should expect some other charges. Most loans have fees to close them. These usually cost around a few thousand dollars. $2k is a good estimate here.

You’ll also have to consider the interest rate on the loan. Typical rates for bridge loans are around 8%-10%. This means after six months with 80k, you’ll owe around $38,400 in interest fees.

The lender will repay your down payment to you when you repay your loan. That gives you back $16k from the earlier example. Subtracting that from the interest rate gets you $21,800.

The closing fee is then added to that debt. In total, you would owe $23,800.

This may seem like a lot. However, your 200k home could sell for 600k after rehabilitation. After the mortgage is paid off, you’d gain a profit of $476,200.

When a Bridge Loan Is a Good Investment Option

The whole process, however, is not as simple as the short summary above makes it seem. There are many specific details that you consider. These can either be manageable or unmanageable based on your situation.

Look at these traits and consider if they match your situation. If they do, it’s relatively safe for you to consider a bridge home loan. If they don’t, you should consider the many other home finance options.

You Have All Basic Loan Requirements

Don’t get lost in all the specific details of this finance option. Remember that it’s still a loan. There are certain financial requirements that you must meet for one.

Be sure to research what makes a financial situation look good to lenders. If yours has all of these traits, then you can move on with getting your home loan. If it doesn’t, back out until you can better your finances.

There are ways to do this, such as bettering your credit score. If you can’t do this in a decent amount of time, however, you should seek other options.

You Need the Money Fast

For many loans, it can take some time to receive your needed capital. You can expect to wait around a month maximum. Others might take around two weeks. .

A bridge home loan is usually faster. It can take as little as five days for you to receive your loan. This can include the entire approval process.

For this reason, this loan can be great in an emergency. If you need to finish some things with your flipping project or you’ll fail, you can take a bridge loan.

Your Rehab Project Will Sell Soon

Again, the usual lending time for a bridge loan is 6-12 months. Your project should be able to sell within that time. If you don’t think it can, look for another type of home finance.

Most of these loans don’t have borrower protections. If your project fails to sell in time, you still have to pay the home loan back. This is why it’s better to use bridge loans for investment purchasing and not refinancing.

If you can’t the lender will foreclose on your home. If this happens, you can face many consequences.

Your credit score can suffer. This can make it difficult for you to get new investment property or lines of credit. It may also affect your future employment status.

There are ways out of this. However, it will save you a lot of stress if you are able to avoid this problem altogether.

You Have a Decent Amount of Spare Capital

Having a decent amount of capital or property in this situation can help immensely. One way it can do this is shield you from any financial crises such as the aforementioned foreclosure.

It can also help pay the loan itself. Bridge loans have high-interest rates and closing fees. This is because lenders must take huge risks with these types of loans.

These closing fees and interest rates can go over your home sale profits if you don’t make much of a profit. If they do, it will help to have extra savings to dip into. This way, you won’t have to renegotiate your payment time or take another line of credit.

You’ve Paid Off Most of Your Mortgage

Having decent-sized equity can give you many benefits. One is that you’ll have more money to work with when selling your project. Another has to do with one of the requirements for a bridge loan.

Most lenders will require homeowners to have at least 20% equity. That is, they need to have paid off at least 20% of their mortgage. For the example above, that would be about $20k.

You may still be able to get a loan without this amount. However, it will make things difficult for you to do so.

Another thing to consider is the risk involved. If you end up foreclosing, you’ll owe less if you’ve already paid off most of the mortgage on your project.

You Can Manage Two Projects

You can use your bridge home loan to pay off the rest of your mortgage. You can also use it to buy a second rehab project. If you take the latter option, you may find yourself running two projects at once.

There are a lot of problems that you can face with this state. One is that you can owe mortgage payments on both homes at once. If you don’t have sizable savings, this may be difficult for you to afford.

Also, on top of the rehab costs for both projects, you’ll need to pay for cleaning, electricity, and such. This can be especially important for your old home if you’re trying to show it to possible sellers. Even if you have the finances to afford this, it can still be an unnecessary expense.

You Can Use the Same Lender for Your Mortgage

Many lenders will only approve a bridge home loan with a certain caveat. They’ll need to be the managers of your new project’s mortgage.

From the lender’s point of view, this deal makes financial sense. Giving out a loan comes with some financial risk. They can lessen this risk by giving themselves the chance of more financial gain.

This also may not be much of a burden to you. You may have wanted to work with this lender on your mortgage anyways. They may be a good option.

If you don’t want this deal, however, be careful. You can still get this type of loan. Just be sure to not get caught in a deal you don’t like.

You Can’t Use a Contingency

Interested parties aren’t always able to make a new property purchase in cash. Their other property may still be on the market. They can still place a claim on the property in this state, however.

Sellers may be willing to enter into a contingency plan with the possible buyers. This is a contract that isn’t binding. Both parties in it can back out if certain criteria aren’t met.

Sometimes, this is used so that a buyer can inspect the property before purchasing. Other times, it helps a buyer ‘purchase’ a property before their own is sold. If the buyer’s property isn’t sold, they won’t owe the cost of the house.

It can be difficult to claim a property with a contingency contract. When a home seller enters into one, they’re putting themselves at risk. If the contract is broken, they may have to backpedal on a lot of their own goals.

Another thing to consider is how the housing market works. Buyers compete with one another to purchase real estate. If a seller can get a contract without a contingency, they’re likely to take it.

To remain competitive, a buyer needs to pay as much as possible towards a home. If they can’t pay the full sum, they should at least be able to pay a sizable down payment. This is where bridge loans can help.

Final Words

Using bridge loans for home purchase can be a great option. You just have to research the facts and consider your own financial state. You should only take the loan once they’re extremely confident that you will come out unscathed.

Once you’re ready, you should consider using LendSimpli for your bridge loan. Their loan rates start as low as 8.50% and their application requires a mere six documents. There’s also no personal income verification required.