Six Questions about Bridge Loans:
- Are these legal? Absolutely yes! The Real Estate Settlement Procedures ACT (RESPA) offers a specific exemption for temporary loans, less than twelve months in term, used to purchase a primary residence. This type of loan is exempt from many of the Dodd-Frank loan restrictions pertaining to high-cost or private money loans. However, it is still a consumer loan, which means that it requires NMLS licensing and consumer disclosures. Many alternative finance providers are not licensed, so it’s important to find a properly licensed provider who specializes in alternative financing and consumer bridge loans, like Arrival Home Loans.
- Are bridge loans risky? Not for qualified buyers. When Arrival Home Loans underwrites a loan, we ensure the borrower has a viable exit strategy (an important element of short-term loans that we will discuss in a later part). The borrower has to have a marketable home and the ability to qualify for a conventional refinance or some other way to pay off the bridge loan by the end of the term. The risk of a bridge loan is if it takes longer than expected to sell the borrower’s current house. A bridge loan carries a higher interest rate than a traditional loan, because it is intended to be short-term, and it can get expensive if the client keeps the bridge loan for longer than intended. The bridge loan can be paid down or off as quickly as possible with no pre-payment penalty.
- Are bridge loans expensive? Perhaps so and perhaps not. Although the costs of a bridge loan are higher than a traditional loan, many times, those costs may be recouped and offset. By vacating the home to sell, before placing it on the market, the home can be touched up and professionally staged, which many times brings in a higher selling price and thus offsets the cost of the bridge loan. At Arrival Home Loans, 75% or more of our clients walk away with more than $100,000 after the costs of the bridge loan. A staged home can sell for 10-20% higher than an un-staged home. Sellers also save on moving costs. With a bridge loan, soon-to-be sellers can move right into their new home without having to sell first or move twice. Moving into a short-term rental can be expensive and stressful. Also, timing the closing of one home with the purchase of another home has many moving parts and if one element does not sync correctly, increased costs and anxiety may set in. This gives them peace of mind as well.
- Do you need an appraisal for a bridge loan? In many cases no. You do not need to wait for an appraisal report to be delivered. Arrival Home Loans uses comparative market analysis (CMA), broker price opinions as well as automated valuation models (AVM) to estimate a fair value for the home(s). If an appraisal is needed, many times it is because the home is unique or major remodeling or additions have occurred in recent years.
- How quickly can you close a bridge loan? We have closed in as little as three days. Our typical closing time is 17 days. Arrival Home Loans has a great operations team that ensures our clients as well as our mortgage and real estate partners happiness.
- Can I buy a home with $0 down with the help of a bridge loan? If we can use equity from another property that has at least 50% equity, you can use that to get a bridge loan. Many times, the new loan will cover the full purchase price, with no down payment required. If the equity allows, you can even borrow more than the purchase price and use those funds to touch up and stage the home that will be sold.