12 Essential Tips for Bridge Loan Borrowers
What are the secrets to finding the best rate on a bridge loan? Borrowers should use these tips to make sure they are borrowing wisely.
Long gone are the days of getting denied by a bank and having to visit a loan shark to borrow money, but payday loan protections still have yet to take effect.
There’s nothing wrong with taking out a loan, especially if it’s for good debt. If you’re going to borrow money, however, it’s vital to borrow from a reputable source.
Are you thinking about taking out a bridge loan? There are valuable tips and tricks to ensure you’re borrowing wisely.
Keep scrolling to uncover 12 of these essential tips for bridge loan borrowers.
What Is a Bridge Loan?
Bridge loans are short-term loans. They enable a user to meet current obligations by providing them with immediate cash flow. Bridge lending solutions typically don’t last longer than a year, as they have relatively high-interest rates.
Typically, bridge loans are backed by some form of collateral, such as inventory or real estate.
More often than not, bridge loans are used in real estate. They provide a way for homeowners to bridge the gap between the sales price of their new home and their new mortgage.
For example, sometimes a homeowner’s existing home doesn’t sell before they close on their new home. A bridge loan helps them close a deal and move into a new home while their old home waits to sell.
Essential Tips for Bridge Loan Borrowers
When you need money, it can be tempting to jump on the first offer that presents itself. Before you sign on the dotted line, though, take into account these 12 tips to better understand bridge loans and your options.
1. Remember That They Happen Fast
Typically, bridge loans happen much faster than conventional loans. Conventional loans often take a few months to process, but a bridge loan can get turned around in as little as weeks or even days.
Regardless of how quickly you need the money, take time to think before you jump in.
2. Recognize the Risk
Sometimes there’s more risk involved with bridge lending, especially as it pertains to real estate. Even if you’re in a seller’s market, there’s always a chance your home won’t sell as quickly as you expect.
Plus, there’s always a chance the market will change. Find out how your lender treats extension requests, and make sure you can pay even if your home takes longer to sell.
3. They’re Perfect for Property Flips
If you’re looking to flip a property, a bridge loan is an excellent choice. If the property needs repair, but your flip turnaround will be short (under 6 months to market), you’ve probably made the right choice looking at bridge lending solutions.
4. Know Your Debt-To-Income Ratio
If you’re going to get approved for a bridge loan, lenders will want to see a low debt-to-income ratio. Not every applicant is approved, so your best bet is going in knowing and understanding where you stand financially.
Having 2 mortgage payments plus bridge loan interest can be a stressful situation, so it’s important to make sure you’re financially able.
Your debt-to-income ratio (DTI) indicates what you can afford to pay monthly. Divide your monthly debt obligations by your gross income, and that’s your DTI. Most lenders want to see a rate of 36% or less, though some are willing to negotiate.
5. Don’t Forget They’re a Short-Term Solution
If you’ve been denied a loan from a conventional bank or lender, but you get approved for a bridge loan, remember that bridge loans should only be used as short-term solutions. Costs are often higher, which is why they’re only meant to last a few months to a year.
Higher interest rates aren’t necessarily bad, as long as you’re in a position to pay your loan back under the short-term agreement made with your lender.
6. They’re Better If You’re in a Seller’s Market
If you’re in a seller’s market, a bridge loan is an excellent option. If you’re in a buyer’s market, however, think before you act. Even if you’re sure your home will sell within the allotted loan time, plan for what you’ll do if it takes longer than expected.
7. Make Sure You Can Handle the Stress
Money is a big form of stress for 6 out of 10 Americans. Take a look at your financial situation and your psyche before you take out a bridge loan. If you’re confident, financially stable, and know that it’s the right choice, then go for it.
If you’re already stressed about debt and finances, however, it might not be the best decision.
8. They’re More Expensive Than Home Equity Loans
Bridge loans have higher interest rates than traditional bank loans. The reason for higher rates is offset by the ease and speed of obtaining the loan.
Just make sure that, because it’s more expensive, a bridge loan is what you need. Don’t be tempted by the speed and ease and base your decision off of that.
9. Pay Attention to Additional Fees
Make sure you go over your contract carefully with your lender. In addition to monthly payments and interest, you’ll also be responsible for additional fees, such as:
- Title insurance
- Notary fee
- Wire fee
- Recording fees
The title insurance and escrow fees will depend on the value of the property. Bridge loan fees are generally developed in the form of points. 1 point represents 1% of your loan amount, and bridge loans generally range between 2 to 3 points.
Don’t forget to ask your bridge loan lender if there are additional fees, or if those fees are covered in the points.
10. Consider Other Options First
Other loans take a little bit longer to get approved for, but there’s no harm in trying those first. If you think you might end up taking longer to pay back your loan, explore your options before you opt to accept a bridge loan offer.
Be sure to weigh the pros and cons of bridge loans too.
11. Apply With More Than One Lender
Especially because bridge loans get approved much faster than conventional loans, there’s no harm in applying with more than one lender. Comparing rates and discussing your options is the best way to ensure you make the right choice. Don’t be afraid to negotiate either.
One great thing about bridge loan lenders is that they’re much more likely to bend the rules and negotiate than traditional bank loan lenders. If you have bad credit, for example, but you have a lot of collateral, it’s likely you’ll still be able to work out a bridge loan offer.
Make sure that you check the reputability of any lender you’re thinking of borrowing from. Look for testimonials, recent loans, and the amount of time for which they’ve been in business, including professionalism across the board.
12. Get Your Paperwork Ready
One essential way to prepare for your bridge loan is to gather all your paperwork beforehand. This is particularly helpful when you shop around for different lenders.
Plus, the more knowledgeable you are about your finances and circumstances, the more a lender will want to work with you.
Here are some important pieces of paperwork to make sure you have ready:
- Social Security number
- Government-issued photo ID
- Last 60 days of bank statements
- Last 2-3 pay stubs
- Credit reports and scores
- 2 years of tax documentation
Understand your debt-to-income ratio and be prepared to discuss your plans for the loan and your plan to pay it off.
Questions to Ask Your Bridge Loan Lender
There are a few essential questions to ask your potential bridge loan lender.
What are your requirements? As you shop around, you’ll likely find that this answer is different for each lender. As you get an idea of what they’re looking for, you’ll be able to decide which lender works best for you.
What are the terms and fees? It’s important to go over all documentation with your lender and to inquire about ALL fees and rates associated with your potential loan. Some bridge loans charge prepayment penalties if you pay too early, for example. Others don’t offer extensions on an existing loan.
Are there any less risky options? There’s nothing wrong with asking your lender if they have any alternatives available. Some might be more willing to work with you if you agree to get your new long-term mortgage through them, for example. In turn, you might get a better rate or convince them to ease up on the restrictions of your new loan.
A Bridge Loan Could Set You up for the Future
Bridge loans aren’t for everyone, but for many homeowners and investors, they provide an easy and quick way to get cash for new investments.
As long as you understand your financial situation and understand why a bridge loan is a smart choice for your endeavor, there’s nothing wrong with jumping in.
Remember to ask questions and weigh your options first.
Do you want to know what a bridge loan might look like for you? Contact us with any questions or concerns!