This is a short term loan taken for a period of 2 to 3 years as one a waits for a larger or a long term loan. From this definition, a bridge loan could be an interim financing for a business or an individual as he waits for a permanent financing. The purpose of the loan is to avail funds to be used to purchase a new home after the existing home has been sold but where settlement will not take place until after the purchase of a new home. In such a case, a bridge loan will allow one to apply the net equity in the existing home as a down payment for the newly purchased home. The loan is meant to alleviate some of the timing pressure resulting from moving immediately from the old house to the new house on the closing date.
How It Works
To buy a new house using the very best top bridging finance loans facility’s, the current home may be used as collateral for the bridge loan. Also, a lien could be placed on the new home to facilitate the processing of the bridge loan. The terms of such a loan could vary but may range from a few weeks to several months.
When the current residence is finally sold, the principal and the accrued interest on the loan must be settled in full. However, during the term, the borrower may choose to make monthly payments or may opt to make payment at maturity for small term loans.
Note that in this type of arrangement, a fully executed copy of sales agreement must be forwarded to the financial institution so that it can verify that actually the existing home settlement will actually occur.
Typically, bridging loans are more expensive than the conventional loans. The reason for this is that the bridging loan must compensate for the additional risks. In addition, the lender of bridging loans may require a lower loan to value ratio as well as a cross collateralization before he releases the facility. Luckily, such loans are arranged quickly and there is very little documentation to be filled.
Uses of Bridge Loans
Bridge loans are used for purchasing commercial real estate where a quick close releases the real estate from an imminent foreclosure. Similarly, the real estate company may want to take advantage of a short term financing opportunity in order to secure a long term financing.
The Responsibility of the Beneficiary
During the term of the loan, the borrower is responsible for:
• Paying mortgage for the new home
• Paying the interest that accrues on the bridge loan
• The remaining mortgage on the loans on the first residence
The beneficiary of the bridging loan must be able to serve a loan through your personal cash flow or the proceeds received from liquidating the asset. Ideally, if this was to happen, ensure that the gross monthly income ratio is not more than 36%. If there is a significant liquid asset that one can sell to meet the requirement, then it should be sold.
The financier must verify the value of the current value of home through a residential valuation before the amount of the bridging loan is computed.
Bridging Loan and a Hard Money Loan
Ideally, a bridge loan has a few overlaps with a hard money loan. They are both non standard loans, which may be obtained on short term due to unusual circumstances. Hard money may refer to any amount of money obtained due to unusual circumstances from non banking institutions. The difference between the two is that bridge loan is a short term loan given by a bank to bridge the gap between longer term loans while hard money can be given by non banking organizations.
Note that a bridge loan may be closed implying that it can only be available for predetermined time frame.
If you are on the look out to get yourself the best top bridging finance loans in London then you may want to choose a loan lender that will have the least disadvantages for you. I’m hoping this article has help you choose weather you need a bridging loan or not.