What is bridge money?
Bridge money is a type of short-term loan that is used until a person or company is able to secure permanent financing or remove an existing obligation. Both corporations and individuals use bridge loans as lenders can customize each loan to fit the situation and this type of financing allows the borrower to meet current obligations by providing an immediate cash flow. These types of loans are generally short term in nature and usually only last about a year. They also usually come with relatively high-interest rates and need to be backed by some form of collateral which can be real estate or inventory.
One reason why people use this type of hard money is to buy another home before selling an existing residence. It enables home buyers to find the down payment for the new home and make your offer more attractive to a seller. However, most lenders will only offer these types of loans to borrowers with excellent credit ratings and low debt-to-income ratios. The bridge loan is usually secured with the buyer’s existing home.
The difference between bridge money and a traditional mortgage is that bridge loans typically have a faster application, approval and funding process than that of traditional loans. However, in exchange for this convenience, these loans usually have short terms, high-interest rates, and large origination fees. Generally, borrowers accept these terms because they need quick, convenient access to the funds being provided. Additionally, they are willing to pay higher interest rates because they know the loan is short term and intend to pay it off with lower interest, long-term financing in less than a year. Moreover, most bridge loans do not have prepayment penalties.
With this type of loan, many lenders do not have set guidelines for FICO minimums nor do they have debt-to-income ratios. Instead, funding is guided by a more make sense underwriting approach that requires guidelines obtained from the long-term financing obtained for the new home. If the borrower has a mortgage on the original home, it will be paid off with the hard money loan and then its payment will be added to the new mortgage for the new home.
There are, however, some caveats to this. For example, if the new home mortgage is a conforming loan, then lenders tend to have more leeway to accept a higher debt-to-income ratio and are able to run the mortgage loan through an automated underwriting program. However, if the new home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50 percent debt-to-income ratio.
Additionally, while you do not have to pay back bridge money for the first four months, interest does accrue during this time period. Moreover, there are fees that must be paid in order to secure the loan. They include administration, appraisal, escrow, title, notary, recording and courier. These can add up to over $3000. In addition, there is also a loan origination fee which is based on the amount of the loan.