Bridging Loan – the Who, What, and Why

It’s the perfect house, and you have to have it. The problem is that your existing house is still on the market and it might not sell in time for you to get this home of your dreams. A Bridging Loan may be the answer to your predicament.

At its basic, a bridging loan is an interest only loan designed to “bridge the gap” between the purchase of a new home and the sell of an old home. It is an expensive option, but could be the difference between getting that new home and losing out to another buyer.

Lenders prefer to give bridging loans to consumers who have already begun the sale of their existing homes. Once an exchange has happened, few sales fall through. Lenders are happy with these “closed” bridge loans.

Sometimes you find the home of your dreams and didn’t even know you were looking. At these moments, you want to buy even though the home you live in is not for sale – yet. Lenders look at these “open” bridge loans with more skepticism. It is important to the lender that a borrower is able to prove the ability to meet the interest payments and even that they have a strategy in place incase the existing home doesn’t sale in the allotted 12 months.

Bridging loans should not be the first line of financing a new home. These loans are only for solving a temporary cash flow problem – like if the sale of the existing home falls through as the purchase of the new home is beginning.

The cost of the bridging loan comes from the added work that must take place by the lender (to insure the borrower’s ability to pay) as well as in the speed that the loan must be accomplished. These loans, although secured by real property, do tend to be a bit riskier for the lender.

The key to getting the right bridging loan is to take a few days to shop around. Although time is usually vital, the moments spent in comparison shopping could save the consumer in the long run.

Bridge loans should only be considered if the borrower is certain that he will be in a position to repay the loan within about six months.

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