What if we told you that you can start making cash-like offers on a house without having to pony up the cash?
It is no secret that right now the real estate market is hotter than ever. Properties are selling so quickly that buyers often need a competitive offer to even be considered. Redfin News offers some surprising statistics about the reality of today’s market.
In February of 2022, 68% of home offers (of which were written by Redfin agents) faced bidding wars. This number is up from 60.2% during the same time in 2021. And even more to the point, this is the highest level that Redfin has seen, according to their records, which date back to April 2020.
Overall, home prices, as of March 2022, were up 17% year over year. This is due to various reasons but a major one is that the number of newly listed homes available on the market dropped by 7%, and those that were available were purchased quickly. Nearly 3 out of 5 homes were purchased within two weeks of listing, with over half of those homes being sold for more than the asking price. Specifically, 59% of homes that went under contract had an accepted offer within the first two weeks on the market. That is an all-time high, and a number that jumped from 53% a year earlier.
These statistics are significant and all point to how intense and unique the housing market is at this moment. People are making large offers to beat out the competition and secure their home purchase. Homes are moving quickly, and you must act fast.
If you and your family are looking to relocate, purchasing a home can be an extremely stressful feat at this time. Unless you are looking to move to an area with a lower cost of living than your current location, you might struggle to match up to other couples or families who are putting offers out there.
It goes without saying that to even be considered, you must make a competitive offer on any home that catches your eye. There is nothing more exciting as a seller than a cash offer for a home, but many don’t have the funds to make that kind of large payment in a short amount of time. So, what are your options? How can you make a cash offer without cash?
Many are unaware that there are ways to make cash-like offers on a home without actually paying cash. And you might be wondering, “How do you make an offer look like cash?” Actually, it is simple, and it is how to earn a leg-up on the competition, and ensure that your offer will be taken seriously. Sellers and agents alike are often in the dark when it comes to using bridge loans as a “cash-like” competitive tool. Hopefully, we can shed some light on this important tool and allow you to gain the confidence needed to submit a competitive offer on the home or property of your dreams.
What is a Bridge Loan?
Many people have equity tied up in their current residence, only to get stuck when they want to move locations or find a bigger house. Many assume they must first sell their old house to gain the cash needed to start making cash offers on homes, but this is not the case. It used to be common that families would first sell their homes and quickly scramble to find a new place to live. Some would get lucky and find the home of their dreams at the perfect moment for a seamless transition, but others would be forced to move into a short-term rental or might even choose to bunk with family for a few months until they secure a new place. However today, for many reasons, this strategy doesn’t always work. A bridge loan was specifically designed to make it easier to move from your current home straight into your next home.
A bridge loan is a type of loan that is often used in real estate transactions in cases when the buyer lacks the funds for a certain home or property. This loan is for people who already have equity tied up in their current home and plan on selling their old property as soon as they can secure a new residency.
Our transitional bridge loan allows the buyer to access a large sum of additional monies so that they can make competitive offers on homes they are looking to purchase. This loan is a temporary financing option that creates a “bridge” and allows the buyer to purchase their next home without having to sell their existing home first. This type of loan is short-term because the lenders expect it to be paid back as soon as your old property sells.
Another thing to mention is that many bridge loans allow buyers to make cash-like offers for homes with few or no contingencies. This is an ideal situation because this makes your offer similar to cash in that it is a sure thing to the seller. Simply put, it’s how to make a cash offer on a house without cash. No more worrying about having to add financing or other contingencies to your offer.
Let’s Dive Into The Numbers
The amount you can borrow when financing with a bridge loan varies based on the company you use, but the rule of thumb is typically up to 75% of the combined equity value of your current home and the property value of the home that you intend to buy. For example, if your current home has equity of $500,000 (example – $1,000,000 market value less $500,000 in loans), and the home you want to purchase has a price of $1,500,000, then the maximum bridge loan amount would be equal to the purchase price of $1,500,000. In other words, there’s $2,000,000 in equity ($500,000 in your existing home plus $1,500,000 in the target home), therefore 75% of that equals $1,500,000. That’s how you can obtain a loan that’s essentially equal to 100% of the target property purchase price!
As you can see, by having this large sum of money available you can definitely stand out as far as making offers to picky sellers.
One important thing to note is that bridge loans often come with higher interest rates than conventional loans. The interest rate range for our bridge loans is 6.99% to 8.99%; however, everyone enters into a bridge loan with an exit plan. The loan has a term of 11 months, though many borrowers pay off the loan in just a few months after selling their old home. Since, we do not offer conventional financing, we refer the borrower back to their mortgage broker to refinance into a conventional loan. This loan program is a tool for borrowers to make competitive offers that compete with cash.
Is a Bridge Loan Right For Me?
There are many different reasons people might seek out a bridge loan. If you are still unsure about whether this is the best option, consider the common reasons below that others decided to finance with a bridge loan during their real estate purchasing journey.
Commonly, people who rely on bridge loans are not able to put up a down payment without having to first sell their current home. Many people find themselves in this position but are not aware of the fact they might be able to obtain a bridge loan.
Another reason someone might rely on a bridge loan is if they are in a hurry to move locations, such as during a career transition or if a family is trying to move before the new school year starts.
Sometimes the timing doesn’t quite line up and the closing date for your new purchase happens to be scheduled after the closing date for the sale of your current home. In this situation, a bridge loan might come in handy.
For convenience’s sake, some decide that they would rather secure a new property and even move into their new residence before ever putting their old home on the market. This is usually because families don’t want to have to move into a temporary rental or stay with family. This causes them to move in and move out of spaces frequently over a short period, which is stressful and most of the time unnecessary.
Sometimes sellers aren’t comfortable with offers that include contingencies. This means that relying on a bridge loan to secure an offer within the market you want might be the best option. Bridge loans offer buyers a way to make cash-like offers on homes without having to rely on any type of contingency. Again, this looks great from the point of view of the seller, as many prefer cash-like offers over any offer with a contingency.
The Pros and Cons of Bridge Loans
Hopefully, by now the world of bridge loans has become clearer. These types of loans are great for those looking to purchase a home under specific circumstances, but it is still important to note the pros and cons of every business and financial decision, especially when making a large purchase such as a home.
One pro of a bridge loan is that the application process is typically quite quick as many companies know that people are working under a tight schedule with their home buying. Closing on a bridge loan takes much less time than when trying to secure other loans, which can be incredibly beneficial in this rapid market if you don’t have the cash to make a cash offer on a home.
A con of a bridge loan is that you pay a higher interest rate because of the flexibility and benefits of this type of loan. Lenders often have less time to make money from bridge loans as they tend to be more short-term than your average loan, so they charge higher interest rates and fees to make up for the lost time.
Another pro is that buyers have lots of purchasing flexibility when it comes to using a bridge loan. This is especially important when a buyer comes across a home that they love. Instead of having to wait until their current home sells, they can make an offer without having to worry about scraping the bottom of their savings.
A con of a bridge loan that many might not consider is the fact that this loan is only available to those who have equity in their current home or property. A bridge loan uses your current home as collateral, so lenders often require a specific amount of existing equity to be present in your current home. Our max LTV is up to 75%, meaning you hold a minimum of 25% equity in your home.
Being able to remove contingencies from your offers is arguably the best “pro” on this list. Not having to rely on any type of contingency already puts you at an advantage above others who are also making offers on the same house. Bridge loans specifically mimic cash-like offers on homes and are often the best option if you are aiming to be a more favorable buyer.
What is the Biggest Risk?
It is important to be aware of the risks that are involved when making large financial decisions. Because a bridge loan uses your home as collateral, it’s possible that if you default on the loan, the lender might be able to foreclose on the home that you intended to sell. On top of that, if you are unable to sell your old property or home by the time you must start repaying your bridge loan, you may be responsible for the mortgage on your new home, the mortgage on your old home, as well as paying down the bridge loan. Of course, this isn’t ideal and does not happen often, but it is important to be aware of the greater risks involved with this type of borrowing.
Wrap-Up
To summarize, bridge loans are a great option for those who want to purchase a new home without having to be stressed about selling their old place first, and for those who want an edge on competing offers. Bridge loans can enable you to make cash-like offers on homes, which will stand out to the seller. Be sure you are aware of the risks. Bridge loans can be a great tool if you are looking for more purchasing flexibility and power. You might want to reconsider if you don’t have enough current equity in your home.
Remember that in the current real estate market, many buyers are having to make cash-like offers on homes that come with no contingencies to even be considered by the seller. Bridge loans offer the competitive edge that you might need to compete in today’s market, enabling you to make a cash offer without cash.
Sources
https://www.redfin.com/news/record-share-of-homes-sold-over-list-in-february/
https://www.creditkarma.com/personal-loans/i/bridge-loan
https://www.forbes.com/advisor/loans/bridge-loan/
https://www.rocketmortgage.com/learn/bridge-loan