This is part 2 of 2 in a short series to clear up some of the questions and misunderstandings regarding owner occupied hard money loans. In this post, I will cover bridge loans and temporary loans.
Bridge loans are fairly well known, at least in terms of the name, if not what they actually are. Temporary loans are similar to bridge loans but not exactly the same thing.
A bridge loan is specifically a loan that is used to buy a property before selling another one. These are short term loans, usually no more than 12 months. There are three basic ways to set on up.
The first way is to use both properties as collateral for the loan. The second is to use only the property already owned as collateral. The third is to use only the property being purchased as collateral. Deciding which option works best for you is something you may need your loan officer to help you with.
Whenever a bridge loan is done, an exit strategy is needed because the lender wants you to have a plan of how you will pay off the loan. They don’t want to foreclose any more than you want them to foreclose.
There can be many valid exit strategies. Probably the most common is to sell the property you already own. In the case where this strategy is used, the entire loan can be paid off from the sale of the property. In some cases, there isn’t enough money to pay off the entire mortgage so a new smaller mortgage is needed at the time of the sale.
Your loan officer should be able to help you figure out your ideal exit strategy and even if you already have it worked out, it is a good idea to go over with him or her to make sure it is workable.
Temporary loans are also short term, just like bridge loans, but they have a different setup and a different purpose. When you have enough equity in your property, are unable to get a loan from a bank and need a short term solution, a temporary loan may be an option.
They are typically setup with no more than a 12-month term and, if the property is your primary residence, there is no prepay penalty allowed.
Regardless of the reason for needing a temporary mortgage, whether it is due to bad credit, income that can’t be proven or a property that won’t qualify for a bank loan, the biggest factors in being able to get approved for one are the equity in a property and having a good exit strategy.
There has to be enough equity in a property to give the lender the comfort to not worry about their investment in lending you money. They have to have confidence that if anything goes wrong, they won’t lose money. You should also want this because you want to make sure you have the ability to pay off the loan and your equity can play a big part in that.
A good exit strategy is one that has a reasonable likelihood of working to the benefit of all. Once again, the exit strategy is something your loan officer should be able to help you with.
I could go on for days explaining all the different ways these loans work but rather than doing that, if you have questions about it, please call or fill out the contact form on our site.