Bridge loans can be a powerful tool for home buyers – especially those who want to sell a property and buy a new one with ease. They are also ideal for investors or retired homeowners who want to reduce the size or get closer to family and friends.
Mortgage expert Arjun Dhingra recently covered the issue in an episode of The Mortgage Reports Podcast, with the help of Sofia Nadjibi, president of the Golden Gate Lending Group.
Are you a real estate owner on the hunt for your next home or investment? See what the couple talked about – and how bridge loans can help you achieve your goals.
Listen to Arjun on The Mortgage Reports Podcast!
What is a bridge loan?
A bridge loan is exactly what it sounds like – a bridge between one property and the next.
Bridge loans are equity-based mortgages. While lenders are looking at your income and other debts, they are not eligible for these mortgages. Instead, they look at the property itself – that is, its current market value and how much equity you have in it. Usually, bridge loans require you to have at least a 50% stake to qualify.
Here is how Nadjibi explained it in the podcast: “When someone has a property that has equity, you want to take that equity and transfer it to another property. “This is a bridge loan.”
The Benefits of Bridge Loans
The great advantage of a bridge loan – especially in today’s hot market – is that it allows you to buy a new property without first selling an existing home.
This can help you avoid unexpected home sales and, perhaps most importantly, give you a larger amount of money to spend on your new home. Then you can move on to a more traditional mortgage later.
Just note that bridge loans have significantly higher interest rates than mortgages. So, if you are considering one to buy your next home, you will want to have a plan to move into a lower interest rate mortgage within a few months.
Borrow loans in today’s housing market
According to Nadjibi, bridge loans have become quite popular since the pandemic began.
“I think the biggest thing we saw about the pandemic is that so many people had lifestyle changes,” Nadjibi said. “They saw their house in a very different way. They saw a house as a place where they wanted to bring their family together, cook and enjoy the yard. “They needed that extra office space to be able to make Zoom calls and the kids could go to school, so they needed more space.”
As a result, more and more homeowners are starting to look for new properties. Some started looking at larger homes with extra space or bedrooms, while others looked at different locations, thanks – at least in part – to the flexibility of remote work.
However, the traditional challenges of selling and buying at the same time remain. And with incredibly tough competition, fast action was crucial. Bridge loans have helped resolve both of these issues at the same time.
Bridge loans can compete with cash bids
“We were able to help many people, especially families, who grew up in their area,” Nadjibi said. “With a bridge loan, since they had this capital in the house they lived in, we could help them without moving. They could stay in the comfort of their own home, get loan approval for the bridge and shop out there. “And as soon as this right house came, they could go with an offer that looks like cash, without surprises.”
This last part is key, Dingra said.
“Many buyers have been frustrated over the last decade by competing for cash bids. They say, “Well, I’m being punished because there is someone who always comes with cash, or another cash offer is beyond me,” Dingra said. “Bridge loans can work as well as a cash offer in these cases.”
Who should use a bridge loan?
According to Nadjibi, three types of buyers can really benefit from using a bridge loan: investors, retirees and existing homeowners.
Let’s look at the benefits for all three groups:
- Investors: Bridge loans allow investors to use the equity in their existing investment properties to buy more. They also allow them to act quickly in a hot market and give them cash-like offers to stay competitive.
- Retirees: As retirees often have limited incomes, traditional mortgages can be more difficult to qualify for. Stock-based bridge loans can be a good alternative, especially if they have been staying at home for a while and have a lot of equity.
- Existing homeowners: Bridge loans allow existing homeowners to shop with ease. They can use the loan to bid on cash-themed bids and then worry about selling their existing property later – after closing and moving to a new home.
“What’s so great is that they do not need to change anything in their normal lives,” Nadjibi said. “So they do not need to try to move to a short-term rental. “They can stay in the comfort of their own home, get approval and then be ready to look outside because they have been approved for the bridge loan.”
How To Get A Bridge Loan
The bridge lending process is quick and painless, according to Nadjibi. Borrowers can be fully approved and ready to start their purchases in just a few days and loans can often close in just 17 days.
See what the Nadjibi bridge loan process looks like:
- Initial consultation: You will talk to a loan officer about your goals and they will help you design a loan strategy that works for your unique situation.
- Application and documentation: You will complete a secure application and submit any required documents. Bridge loans usually require less paperwork than traditional mortgages, although you will need a few more. You can expect a lot of documents related to real estate (mortgage statements, insurance contracts, etc.)
- Undertaking and approval: Your application is sent under contract and is usually approved in less than 24 hours. Then you can start bidding on real estate as you wish
- Closure: Once you find a place, make an offer and sign a contract, your loan can move towards closing. This can take just 17 days from start to finish
Once you have moved into the house and sold the previous one, you will usually want to restructure the loan and move on to a more traditional mortgage. (This will lower your price and make your monthly payments more affordable).
According to Nadjibi, the typical borrower is on a new loan within about 45 days.
“The goal is to get into the new property and get out of this bridge loan as soon as possible,” he says.
Learn more about bridge loans
If you want to learn more about bridge loans or are thinking of using one for your next home purchase, contact a mortgage specialist today. They can help you make the right decision for your goals.
The information contained on The Mortgage Reports is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its executives, parent or affiliates.