Buying a house can be lengthy and complicated, especially if you want to sell your house and buy a new one simultaneously. There are various factors that you have to think about, and in some cases, buyers encounter a position where they find a home to purchase before they can close the sale of their home.
For this type of concern, a bridging loan can be a good choice. Continue reading to learn more about bridging loans.
What Is a Bridging Loan?
Bridging loans are short-term loans that are used to pay off the mortgage of your current home. You use this loan to buy your next home, and after you sell your existing home, you pay off the bridging loan.
Typically, bridging loans are used to buy something you will keep permanently, such as a newly built home. These loans are not intended to be used to buy a temporary home, like a vacation property or a second home.
Who Should Apply for a Bridging Loan?
Bridging loans are appropriate for people who have multiple properties, like a vacation home and their primary residence, and they want to sell their primary home to pay off their mortgage.
Bridging loans are also used when the process of a home sale is delayed. For example, you want to sell your primary home and buy a new one, but you're waiting on the closing date for your primary residence.
Bridging loans are also used when you want to make renovations or repairs to a house so you can sell it for a higher price. For example, you might want to remodel a kitchen before selling your home. In this scenario, you would close on the loan for the renovations and get the new loan after you sell your home.
How Does a Bridging Loan Work?
Before you receive a bridging loan, your lender will conduct a thorough home loan application. You must get pre-approved for the loan before looking for a house. The lender will want to see your tax returns and proof of income before they issue a loan. The lender will also want to see your bank statements to ensure you have enough money to make the mortgage payments.
Once you find a house, you must submit a purchase offer to the seller. The purchase offer will include information about the proposed loan, including the lender, the interest rate and the loan term. The purchase offer will outline the date you expect to close on your home.
If the seller accepts your offer, you must have a lawyer review the contract before you sign it. Once you sign the contract, you have to submit it to the lender for review. If the lender approves the contract, you can go ahead and close on the house.
What Are the Advantages of a Bridging Loan?
The main advantage of a bridging loan is that it is a quick and easy way to fund your next home. You don't have to put your life on hold. With this loan, you can buy a new home while waiting to sell your current home.
Also, bridging loans are relatively simple to qualify for. If you have a history of making timely home mortgage payments, you should not have a problem getting approved for a bridging loan. Bridging loans are available to most buyers, and they are not as restrictive as mortgage loans.
What Are the Disadvantages of a Bridging Loan?
The main disadvantage of a bridging loan is that it's also more expensive to obtain a bridging loan than a traditional home loan. In addition, you need to pay fees to get the loan, which can increase the total cost of the loan.
In some cases, the seller can reject your offer. If they decline your offer, you need to find another house to buy.
How Much Can You Borrow in a Bridging Loan?
The amount you can borrow for a bridging loan depends on the value of the property and the amount of equity you have in it. Bridging loans are sometimes called "interest-only loans" because a lender will only pay the interest payments for the first few months. After that, you need to start making payments for the principal balance.
Bridging loans are usually issued for six months to one year. The actual term of the loan varies and can be negotiated. In some cases, you might be able to get a bridging loan that's as long as five years. The lender will have a maximum period and let you know the interest rates they can charge on a loan.
How Much Can a Bridging Loan Cost?
The cost of a bridging loan will depend on the lender, but the interest rate will usually be higher than it would be for a traditional mortgage. Bridging loans are usually short-term loans, and lenders charge a higher interest rate to compensate the lender for the higher risk of the loan.
In addition to the interest rate, you will be charged fees and closing costs. These closing costs include the origination fee, appraisal fee, title search, title insurance, document preparation fee and any realtor commission.
Where Can You Apply for a Bridging Loan?
You can apply for a bridging loan with any mortgage lender. If you are applying for a bridging loan, you need to find a lender willing to accept an interest-only payment for the first few months.
Some lenders will offer a bridging loan that is more expensive than your traditional home loan. If you are going to apply for a bridging loan, you should compare the rates and terms from a few different lenders to ensure you are getting the lowest rate.
What Are Possible Alternatives to Bridging Loans?
One alternative to a bridging loan is a seller financing agreement. If you know the seller is amenable to this type of loan, you might be able to borrow from the seller. The seller will lend you the money you need, and you can repay the loan with interest.
Another alternative is for the seller to pay the closing costs for your home. In this scenario, you would use a smaller down payment to purchase your home. Once you sell your current home, you would give the seller a check for the money to pay the closing costs.
You may also consider applying for a traditional home loan to get your house's down payment.
Bridging loans can be an excellent way to buy a new home if you wait for your primary residence to sell. If you make timely home mortgage payments, you should not have a problem getting approved for a bridging loan. If you want to know more about this type of loan, contact conveyancing solicitors. They may be able to explain the loan in more detail.
Find the best solicitors to work with when you compare conveyancing quotes using Conveyancing Calculator. We can help you get fully transparent quotes to save time and get the best deal for your needs. Call us at 0330 043 1202 for more information.