How do you get a bridge loan? It might be better to ask first “what is a bridge loan?”
Yes, we know the competition is thick right now. Buyers are making 7 or 8 offers before landing a home. Sellers are afraid to sell because they fear not being able to find and purchase a new home; this only compounds the inventory issues we are experiencing. We can go on about more challenges brought about by the seller’s market, but let’s focus on these first two and how we have a tool to address both. A tool that you as a reader, being the real estate agent, the mortgage broker, or the borrower can use to your advantage. This tool is the bridge loan, and we want to show you how to get a bridge loan. There are many ways to go about this.
Did you know that a parent could use the equity in their home to fund a bridge loan for the millennial borrower? Or, did you know that you can cross multiple properties as collateral for the loan? A gift is also acceptable from a family member for the down payment. There are many ways to get a bridge loan when working with private money that just wouldn’t fly with a conventional lender. Taking a short dive into what they are should help equip you to use the tool and put you on the path toward getting a bridge loan in California.
What Are Bridge Loans?
“A bridge loan is a form of short-term financing that gives individuals and businesses the flexibility to borrow money for up to a year.” (forbes.com) Yes, this short-term financing has the power to solve many loan scenarios, but it does require equity. The American homeowner has enjoyed an equity increase these last couple of years, and many could stand to benefit from bridge loans. So how do you get a bridge loan?
“CoreLogic analysis shows U.S. homeowners with mortgages (roughly 63% of all properties*) have seen their equity increase by a total of over $3.2 trillion since the third quarter of 2020, an increase of 31.1% year over year.”
Often referred to as a swing loan, interim financing, gap financing, or bridging loan, this short- term solution generally has a term of six to twelve months with interest-only monthly payments. The key to getting a bridge loan is using the equity you the borrower haves in your home. To secure the debt, your current home is used as collateral to borrow money for up to a year. You can borrow up to 100% of the purchase price of your next home, if you provide additional real estate collateral. And you must typically meet a combined loan-to-value (CLTV) of some sort. For our bridge loan, this is 75%. The equity is your built in down payment for your next home. This means that you now have the power to buy before your current home sells. This can present a huge stress relief for many eager sellers.
How Do Bridge Loans Work, and Getting a Bridge Loan in California?
You will fill out a typical URLA (Uniform Residential Loan Application) 1003 Form, along with a few other supporting documents required for compliance. In comparison to conventional financing, it is noticeable that we require far less documentation than a bank will. That is because the decision for the loan is not based on your credit score.
“With a private money loan, that’s not the case. Your creditworthiness does enter the picture, but it’s not as important. That’s because the lender often makes a decision based not on your credit score, but on the value of the property being purchased. The lender’s inherent risk increases, and that means there are a few additional requirements for would-be homebuyers.”
So getting a bridge loan in California is all with the equity in your home as your down payment source, you can enjoy the ability to make cash-like offers with low or no contingencies on your target property. Yes, this means that you can compete with the cash buyers of the world. Nobody wants to see their offer being sent to the seller, only to have it immediately disregarded due to a contingency on selling their existing property. A seller wants a sure thing, and in this market, they are not waiting around for you to sell your home.
How to get a bridge loan to buy a house? Everyone wants speed to close these days, and with our private money bridge loan product, you have the ability to close in 7-14 days. With this position to close quickly, please keep in mind that TRID guidelines are followed that have imposed waiting periods. These waiting periods can be as much as ten business days, and are important to remember when estimating a close date.
It is also important to line up long-term financing in advance. We call this planning your exit, or having an exit strategy. When the term of the loan is up, the loan becomes due. You will want to refinance out of the short-term financing into loan-term financing or a traditional loan before this happens. This is a key component in how to get a bridge loan from us. If we do not see a viable exit plan, we will not make the loan. Our loan consultants are experienced in helping borrowers plan this conventional financing exit. We also help real estate agents become experts at this.
What are the average fees attached to bridge loans?
“Bridge loan interest rates depend on your creditworthiness and the size of the loan but generally range from the prime rate currently 3.25% to 8.5% or 10.5%.” (forbes.com)
When specifically looking at our owner-occupied private money bridge loan, getting a bridge loan in California you can expect to pay anywhere from 6.99% to 8.99% in interest, and anywhere from $1995 to $2495 in evaluation and processing fees. You can also expect to pay 1.5 to 2.5 points for the origination fee, and a possible appraisal fee of up to $500 (not always needed). Your rate plus closing costs and expenses vary based on four things:
- LTV
- Is there a referring broker?
- Your credit
- Loan Amount
The higher the LTV or the lower that your credit score is, the higher the risk or cost of the loan will be. The smaller loan amounts will also have higher interest rates because higher loan amounts have lower interest rates in general. You should also keep in mind the fees that go to a referring broker for helping you close the loan. All these things factor into the overall cost of the loan and getting a bridge loan in California..
Why is an exit strategy so important?
The main reason that this is part of how to get a bridge loan is because you do not want to be caught making payments on two mortgages. That defeats the purpose of the bridge loan. It is supposed to bridge the gap between mortgages. To be profitable, it is a tool that is intended for short-term use. Typically our borrowers refinance out in months with the help of an exit strategy in place. This take out loan will pay off the bridge loan, and refinance your purchase loan with conventional rates. Oftentimes, our borrowers are able to recoup any money paid in interest with the ability to sell their home staged. Homes that are staged typically sell for a 15% higher purchase price. Not to mention, who wants to show their home with all their belongings in it? Nobody. It’s a win, win to stage your home.
What Are The Drawbacks Of Getting a Bridge Loan in California?
Not too long ago, we listed out all the pros and cons of getting a bridge loans. Below is a list of the cons:
- You pay higher interest rates for the convenience, speed, and reliability of financing your purchase through the equity in your existing home.
- It is only available to those who have equity in their current home or property.
- You run the risk of foreclosing on your home, if you default on the loan.
- Selling your home before the end of the loan term is up can be a challenge, depending on the current real estate market.
The last con brings us to our next point.
How Does A Seller’s Market Lessen Bridge Loan Risk?
Nerdwallet.com listed, “You’re confident your house will sell but prefer to secure a new home before listing it,” as one of the times that you should use a bridge loan. We are currently in a seller’s market; homes are closing in record time, often for well over asking price. This means that the risk of not selling your home before the end of the 11-month term is largely reduced. The real estate market is always changing, and so this risk factor naturally is always changing. Right now is a great time to apply for getting a bridge loan for the best possible outcome.
Does this make bridge loans a good idea?
How to get a bridge loan is relatively easy, but should you move forward with one? We have experienced loan originators who are trained in evaluating risk and communicating this to the borrower. If you think a bridge loan could help buy you time, save a deal that has fallen out of escrow, or just secure the down payment for your next home, please don’t hesitate to call 415-926-4444 to be connected with a member of our sales team.