Moishe Alexander lending tutorial: Bridge loans are often used to buy a home either as an investment or to live in. They are advantageous when your credit is good but you have little cash on hand and expect to have cash soon. Unfortunately, there are pitfalls when using a bridge loans for your financing. It is important to understand what these loans are and their potential dangers.

What is a bridge loan again?

A bridge loan is a short-term financing, usually 12 to 36 months, that allow you to buy an asset now, pay back the bridge loan with the sale of another asset and then get a traditional mortgage on the new property you acquired. Bridge loans are easier to qualify for, faster to get approval for and often can be converted to a longer-term mortgage by the same lender.

Higher interest rate and double fee

One of the drawbacks a of bridge loan is the interest rate.  It is usually at 2 percent above standard mortgage rates. All lending is based on the risk assumed by the lender. In most cases, the borrower’s financial condition won’t meet the requirements for a traditional mortgage until a home is sold. Lenders have more flexibility in which to make a judgement call when offering a bridge loan than with a 30-year mortgage, but because the risk is higher, the interest rate will be higher. In addition to paying higher interest rates, bridge loans have many of the same fees a long-term mortgage does, some of which you will have to pay again when you pay off the bridge loan and convert to a traditional mortgage. Additionally, for the period you have the bridge loan, you will be paying monthly on that loan and your current home loan.

Home equity may be at risk

Most bridge loans will not cover 100 percent of the new home to be purchased, 80 percent is the mortgage industry standard.  The borrower often uses equity in a current home as collateral for the loan. If the first home does not sell, and you cannot pay off the bridge loan for the new home, you could face foreclosure on the loan on your existing home. It is important to gauge the likelihood of selling your home.

Additional work for you

Bridge loans are a far smaller piece of the lending industry than mortgage loans. You can compare mortgage loans online easily and narrow your options. But bridge loans are unique to every borrower and lender. You will have to put in the time to talk to a trusted lender.