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Modification Of A Bridge Loan

Modification Of A Bridge Loan

A bridge loan is a short-term loan that is used to provide financing to a person or company during a period of transition. In other words, a bridge loan is there to help you “bridge” the financial gap for a short period of time (usually up to one year). Bridge loans are commonly used in real estate and allow you to use the current equity (value of home minus remaining mortgage) of your home to borrow money.

As an example, let’s say you land an awesome new job, but in order to take it, you have to relocate. So, you put your home up for sale and, while you’re anxiously waiting for a buyer, you find the perfect home in your new city. You want to buy a new house but you won’t have enough money for a down payment until your current home sells.

A bridge loan can provide you with the money you need now so that you can buy a new home before you sell your current one. Companies can also use bridge loans to help cover certain costs while they wait for more long-term funding.

Once you find a lender that offers bridge loans (more on that below), you will then need to see if you qualify for a bridge loan. You will need to satisfy the following criteria:
• How’s your credit? Lenders will want to see a good-to-excellent credit rating.
• Do you have enough equity in your home? You need to have at least 20% equity in your current home.
• What’s the housing market like where you live? Lenders will look at the housing market in your area to try and assess if your current house is likely to sell quickly or sit for an extended period. If the market is stale, a bridge loan might not be the right solution.
• Can you afford it? Lenders will use different financial metrics to decide if you can afford to take on a bridge loan. Like I talked about before, they will look at things like your debt-to-income ratio.
There are definitely benefits and downsides to bridge loans (more on that later). However, a bridge loan might be an option for you if you meet some of these criteria:

You need money fast

If you’re in a situation where you’ve found your dream home and put in an offer but the seller won’t accept a contingent offer (the contingency being that you have to sell your home before you can purchase theirs), then you might consider a bridge loan. You can use the money you obtain with a bridge loan to make a down payment on your dream home and secure the sale, while you wait for your current house to sell.

You expect your current home to sell quickly

If you’re in an area where homes sell quickly then you might be well-positioned for a bridge loan. This is because bridge loans are meant for the short term. So, the quicker your house sells, the sooner you’ll have the money you need to pay back your loan.

You don’t want to sell your home until you’ve purchased a new one

Maybe you’re afraid that your home will sell super fast – before you’ve found a new place to live. This could result in you having to find temporary housing, and that can get expensive. If you want to secure the purchase of a new home before you sell your current home, then a bridge loan is a financial tool that can help you to achieve this.

You can financially handle it

Are you even eligible for a bridge loan? There are certain metrics that you will generally have to meet like having a low debt-to-income ratio. What is a low income to debt ratio? It’s a comparison of how much of your income is going to debt repay off each month for things like your mortgage, car payments, or credit card payments. You’ll be more eligible for a loan if you have a low debt-to-income ratio this signifies to lenders that you can manage your money.

They can see that you have enough money to pay your bills (or pay back loans), and that makes you an attractive borrower. While some people are well-positioned to take on a bridge loan, there are others who are not. This can be based on a number of scenarios including some of the following.

Bridge loans are short term loans. Usually, you have to pay them back within the term of a year. If you think it’s going to take months or years to sell your home, then this is not a good choice for you. There is nothing more adult than having a mortgage. And, honestly, having to pay a mortgage kind of sucks. Having to pay two mortgages would suck even more. If you’re not interested in managing two mortgages at once, then maybe no bridge loan for you!

How Do You Get A Bridge Loan?

Not every lender will offer a bridge loan on their menu of financial items as they are somewhat of a specialty item. Below are some of the places that are likely to offer a bridge loan option.

Your bank

You can start by reaching out to your current local bank or credit union to see if they offer bridge loans. Your local bank is a good option because you have history with them and, because they are local, they will be aware of what is going on with your local real estate market.

Hard money lenders

Hard money lenders are private mortgage lenders (meaning an individual or company not a bank) who lend their money to those who need it. Be aware of hard money lenders as they tend to charge some of the highest interest rates. Loans from a hard money lender have been referred to as “last resort loans” due in part to the high rates.

Mortgage broker

If you need help finding a bridge loan you can also reach out to a mortgage broker to see if they can assist you in your search. They should also be able to answer any questions that you might have in regards to whether a bridge loan is right for you.

Benefits Of Bridge Loans

• Quick application, approval, and funding process – The process of getting a bridge loan is often faster than securing other types of loans.
• No home sale contingency – Your offer might be more appealing to a seller if there is no home sale contingency. Many people include this contingency which basically means that they will only go through with the purchase of the home if they can sell their own home within a certain period of time.
• No expensive, intermediate accommodations – A bridge loan means you don’t have to shack up in a rental or a hotel if your home sells before you find a new place to live.

Downsides Of Bridge Loans

• You pay a high fee for convenience – Because bridge loans are generally short-term (to be paid back within a year or less), lenders charge more for interest to ensure that it’s worth it for them. There are also origination fees associated with closing costs so make sure you know the cost of everything involved before you commit.
• Having to pay for multiple mortgages – When you take out a bridge loan to purchase a new home prior to the sale of your current home, you will be paying two mortgages. This isn’t an ideal situation.
• Require a strong financial situation – In order to be eligible for a bridge loan, you have to be in a pretty secure financial position. If you have a ton of debt or a terrible credit score, then you might not even qualify for a bridge loan. You also need to have considerable equity in your home (min of 20% equity).

Pros and Cons of Bridge Loans

Bridge loans are short-term loans in which a property owner borrowers against the equity in their existing real estate. The intention is that the borrower will purchase new real estate. After the new real estate has been secured, the previous property will be sold in order to pay off the bridge loan. Bridge loans are useful financing tools for homeowners and real estate investors with sufficient equity within their property. Prior to applying for bridge loans, it is necessary to understand the pros and cons of bridge loans.

Bridge Loan Pros

• Avoid Moving Twice: If the homeowner obtained a residential bridge loan they would only need to move one time. Once the bridge loan is funded, the homeowner would have the needed funds to purchase the new home. After the new home is purchased, the homeowner moves and sells their previous home. If the homeowner decides to first sell their current home to access the equity in the property there would be additional steps. The homeowner must move somewhere temporarily and sell their home. When their home sells, they would use the proceeds to purchase their new home. Once they have completed the purchase of new home the homeowner would then move from the temporary housing to the new home.
• Access equity quickly without selling: The purpose of a bridge loan is to borrow against the equity in an existing property in order to purchase a new property. Hard money bridge loans can be approved and funded very quickly. Bridge loans for investment property can be funded in as few as 3-5 days if needed. Owner-occupied bridge loans take 2-3 weeks as there are additional federal regulations that all lenders must follow. Hard money bridge loan lenders typically provide approval and funding much faster than conventional lenders who offer bridge loan financing.
• Present a stronger purchase offer: Homebuyers will occasionally present a purchase offer that is contingent on their current residence selling before closing the new home. Buyers must submit this type of offer when they don’t have cash on hand for a sufficient down payment or all-cash offer and need the equity in their current home to complete the purchase of the new home. This type of offer may work in some situations, but from the seller’s point of view this type of offer is weak due to the inherent risk. There is no guarantee the buyer’s property will sell quickly and at the estimated price. Any other comparable offer without a contingency to sell an existing property would likely be accepted instead. During a rising real estate market, purchase offers with contingencies to sell are not likely to be accepted or even responded to. A buyer who chooses to obtain a bridge loan against their current home and present an offer with an all-cash offer or sizable down payment has a much better chance of their offer being accepted. Bridge loans can help a buyer completely change their situation and take a purchase offer from very weak (contingent on sale of current home) to very strong (all-cash offer).
• Receive bridge loan approval after being denied by banks: Hard money bridge loan lenders are asset-based lenders and are most concerned with the value of the real estate as well as the equity the borrower has in the property. Hard money bridge lenders are able to lend to borrowers with bad credit and issues including foreclosures, discharged bankruptcies, loan modifications and short sales if the borrower has significant equity within their real estate. Institutional lenders like banks are much more concerned with a borrower’s income history and credit scores. Banks will see any issues on a borrower’s record as a red flag and probably deny the bridge loan request.
• Attain a bridge loan against currently listed real estate: Hard money bridge loan lenders are in the business of providing short-term loans and will provide bridge loan mortgages for real estate that is currently listed for sale. Most institutional lenders will not consider a loan against a property that is currently listed for sale. These types of lenders do not want to go through the process of approving, underwriting and funding a loan only to have the loan be paid off within 2-3 months.
• Income documentation not required: The current federal regulations require the borrower to provide income documentation for owner-occupied loan. The lender is required to calculate the borrower’s debt to income ratio and make sure it remains in a reasonable range. Borrowers without sufficient income documentation cannot qualify for an owner-occupied loan because of the Ability to Repay Rule. Both conventional lenders such as banks and credit unions and private hard money lenders must comply with this rule. The Ability to Repay Rule does not apply to bridge loans as there is special exception. The sale of the existing property that will be sold once the new property acquired serves as the repayment for the loan. Bridge loans may be the only type of owner-occupied financing available for self-employed individuals, seniors, retirees, and those without income (but have equity in their home).

Cons of Bridge Loans

• Higher interest rates: Hard money bridge loan lenders have higher interest rates than conventional lenders. The fast approvals and funding provided by a hard money bridge loan lender generally justify the higher rates for the borrower. Hard money bridge loan rates are higher compared with conventional loans, but the borrower will only have the bridge loan for a very short term (12 months or less). The borrower may only make a few monthly payments before the bridge loan is paid off. The overall interest paid on the bridge loan is not likely to be substantial.
• Higher transaction costs: Origination fees for hard money bridge loans are typically in the form of points, which are likely to be in the range of 1.5-3 depending on the lender and other factors of the loan scenario. Borrowers also will have to pay for standard real estate transaction fees including title insurance, escrow, notary and recording fees.

Loan Modification

• Explain your hardship. Why are you behind? Was it a result of unemployment, or excess medical bills, or family emergencies that are making it difficult to make your mortgage payments? You’ll need to be able to explain your circumstances to your counselor and your mortgage company. Start by writing a hardship letter to illustrate to your lender exactly why you fell or why you are falling behind.
• Document your income. Now is the time to gather your paystubs, bank deposits etc. whatever documentation you can provide that will make up your total income. If you’re self employed, you’ll need to provide a profit and loss statement for the last 3 months or more.
• Outline your expenses. In order to determine your mortgage payment’s affordability, the lender will evaluate your income vs. your expenses. As accurately as possible, write a list of your 3 monthly payments for groceries, utilities, child care, medical expenses, loans and credit cards, car payments, insurance, student loans, etc. Note: Current affordability guidelines require that your mortgage payment be no more than 31% of your total gross monthly income.
• Gather your Federal Tax Returns. You’ll need to provide federal tax returns for the past two years as part of your financial picture.
• Provide proof of insurance. You’ll want to have proof of insurance on hand to provide to the lender/counselor, as well.
• Be prepared to interview with a counselor. As part of the process, you may need to meet with a counselor. At that meeting, the Counselor will explain how the program works, determine the best options for your situation and explain what happens next.
• Stay connected. Follow up with all appointments, meetings, phone calls etc. and stay in contact with your counselor. Provide current contact information so that you can be reached quickly during the process.
• Deliver documents as requested. Be sure to provide all documentation and information the lender and counselor requests as quickly as possible. Failure to follow up with any requests for information may delay the processing of your loan modification.
• Keep careful records. Be diligent and document your conversations, the names of the people and organizations you spoke with, their phone numbers, when you spoke with them and what was discussed. Keep copies of all communications letters, faxes, emails etc. exchanged throughout the process.
• Protect Yourself. Check out our pointers on Traps to Avoid When Modifying Your Mortgage and learn simple guidelines to avoid Foreclosure and Loan Modification Scams.

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Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506
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