Everything You Need To Know About Bridge Loans

Lyn Ridley - 2020-10-06T21:00:00.000Z

If you’re in the process of selling your home in order to buy a new one, you may be wondering how to cover your property expenses while you wait for the proceeds of your sale to come through. That’s where a bridge loan can be extremely helpful.

In this article, we’ll take a closer look at some of the benefits of these financing products and take you through the steps involved in applying for one.

How Bridge Loans Work

What exactly is this type of lending product — and can you get a bridging loan with bad credit? Here’s what you need to know before you apply.

A bridge loan provides short-term financing (with a repayment period of 12 months or less) that’ll allow you to cover the cost of a down payment and other fees associated with your new property purchase
You’ll typically be able to finance up to 80% of your LTV (loan-to-value) ratio using this type of loan

The Pros And Cons

Having a source of financing while you wait for your old home’s sale to close can be a financial lifesaver. However, before you apply for bridge financing, you’ll want to consider both the benefits and drawbacks of this loan type.

The Pros:

Straightforward application process: When you’re under pressure to settle the down payment on your new home you’ll appreciate the speed and efficiency of the application process associated with most bridging finance products
Access to funding: Instead of waiting weeks for a traditional source of financing, you could have the funds you require within days — and this will give you an edge when you make your offer to buy a new home
Competitive APRs: You’re likely to get a better interest rate on this type of loan than you would from most other types of short-term borrowing

The Cons:

You’ll need equity in your mortgage: Due to the LTV ratio requirements that form part of the qualification criteria for this loan type, you’ll need to have paid down your mortgage loan by at least 20% before you apply
Shorter repayment time frame: With a loan term of 12 months or less, you’ll pay a higher monthly installment on a bridge loan than you would on a bad credit personal loan or credit card

Who Should Apply For A Bridge Loan?

Before you decide to submit a financing application, it’s always a good idea to understand whether the product suits your needs and situation.

Bridge financing is ideal for homeowners who are in the process of selling their primary property and need a short-term secured lending solution
You’ll want to ensure that you have sufficient mortgage equity and a monthly surplus to cover the higher than average monthly payment amounts that are associated with this type of borrowing

What Kind Of FICO Score Do I Need To Apply?

Before you apply for any loan, you’ll want to consider your credit score and compare it to your lender’s general requirements.

The specific credit score needed to qualify for bridging finance will depend on the lender you select. In general, you’ll want to have good to excellent credit to increase your chances of application approval
In terms of FICO scores, you want to aim for a number between 670 and 850. The higher the score the better the likelihood of approval. If you don’t know your credit score or have a feeling that it may be lower, you definitely want to check your score before you apply

Alternatives To Consider

There are several types of lending products that can help you finance the down payment on a new home. If your bridge finance application has been rejected or you feel that your chances of approval aren’t that good, you may want to explore the following options:

Home equity financing: A home equity line of credit (HELOC) will empower you to borrow against the value of your home and repay the balance over a fixed period of time
Credit cards: Depending on how much you need to borrow, a credit card could be a good option. Your APR will depend on your credit score and you’ll have more flexibility in terms of monthly payments if you choose to pay just the minimum amount due
Bad credit personal loans: If you need access to some funds to pay for unforeseen expenses, you can always opt for a bad credit loan. These products feature fast application times and lending criteria that don’t penalize borrowers with low FICO scores

The Bottom Line

Bridge loans are an excellent financing option for homeowners who are in the process of selling in order to purchase a new property. Applying for bridge financing can help you cover the down payment on your new home while you wait for the proceeds of your sale to come through — but you’ll need excellent credit and sufficient mortgage equity to qualify for one.

As a bad credit customer, you may also want to consider useful alternatives like credit cards, HELOCs, or personal loans to finance your down payment if you’re struggling to come up with the required funds.