Bridge loan is a short term loan or “gap financing” for individuals and investors. These types loan often do not have minimum credit score requirements or debt to income ratios. They are geared towards providing interim financing until more permanent financing is obtained or an event has taken place such the sale of a property.
Bridge Loan Benefits
There are a few benefits of bridge loans depending on circumstances such as:
- A buyer can buy another property without having to wait for another one to sell first
- A buyer can buy a property quickly in competitive markets and obtain permanent financing after the purchase.
- If qualification for a conventional loan is not possible immediately but will be after a certain time period, this type of loan can provide temporary financing.
Bridge Loan Drawbacks
There are some drawbacks to getting a bridge loan such as:
- bridge loans can be expensive
- borrowers may have two loan payments (as in the case where a property is purchased prior to sale of current property)
- Events may not turn out to be expected e.g. current property may not get sold within the time expected or may be sold for less than expected.
Bridge Loans vs Home Equity Loans
It is possible to use a home equity loan on the current property to buy a new home instead of getting a bridge loan. However home equity loans are not available in all states and if the home is on the market there is very likelihood that a lender will not make a home equity loan on the property.
Although a bridge loan may work out more expensive it is “easier” to get than a home equity loan and in most cases faster.