Thursday, December 12, 2013
Bridge Loans for Real Estate Investors
For sellers/real estate investors that want to buy a new home before selling their homes, a bridge loan is a viable option.
The US real estate industry is making a slow recovery, but it’s still a buyer’s market. House prices are on the low side and homes tend to sit on the market. Homeowners looking to sell their existing home and purchase a new property may find themselves in a difficult situation. It’s easier to buy than sell a home.
In this situation, in which an investor wants to buy a home before selling an existing home, a bridge loan is a viable option. These loans provide a means to afford owning two properties for a short period of time. The stipulation is that the recipient is attempting to sell a home. They are an invaluable resource for real estate investors who are flipping property. Often, they use bridge loans when snatching up a great deal on a foreclosure property.
For homebuyers and property flippers, bridge loans enable investors to close on a purchase quickly before the selling process is complete. The borrower uses the funds to repay the bridge loan after the sale of the original property is complete.
There are two basic types of bridge loans. In one type, buyers use the loaned money to pay off the mortgage on the existing home and make a down payment on the new home. Borrowers in this scenario only need to worry about repaying their existing mortgage and will have funds to sink into the new property once the sale closes. In the second type, the homebuyer borrows against the equity of the existing home to use for the down payment. The second option is more complex than the first.
Bridge loans are short-term financing plans that are only used for transactions that involve multiple properties. They bridge the gap between the purchase of a new home and a sale of an existing one. Usually bridge loans must be paid back within six months. So, the state of the real estate market becomes quite important to honor the terms of the loan. If the existing property is slow to sell, borrowers may have to renegotiate the terms of the loan and have it extended.
There are risks, as with any real estate investment and home loan. However, if you’re a real estate investor with something to get rid of and an eye on a property that may be off the market soon, a bridge loan is a viable option.