You may have heard of bridge loans and you may have been told what they are. But the likelihood that you have been given incorrect information about them is very high.
Many people, even realtors and loan officers, who have called us regarding a bridge loan thought it was something it wasn’t.
The correct definition of a bridge loan is a loan that is used to buy a property before selling another property. It is a short-term loan, not more than 12 months. It is used when the person buying the property cannot qualify for a regular bank loan as long as they own both properties.
To do this type of loan correctly, the lender would need to make sure the borrower has an exit strategy, meaning they have a way to pay off the loan before the 12 months are up.
A common strategy is to pay it off when they sell the property they already own. Another one is that when the first property is sold, the one they just bought is refinanced into a new loan.
Bridge loans can be very useful for those who want to by a property before selling one they already own. Someone who is able to buy their new property without having to sell the first one can have an advantage over other buyers because it takes the time to sell out of the process.
This is especially true when there is a good amount of equity in the property they already own. That equity can be used to secure the new property instead of having to put in a big down payment that may not be available.
Bridge loans can be used for purchasing rental property or to buy a primary residence. They can also be used to buy commercial property. In fact, they can be used to buy any type of property as long as the numbers work.