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How does a Bridge Loan Work

how does a bridge loan work

Businesses have different arrangements regarding the payment of loans and Bridge loan is one of them.

Bridge loans are very helpful to businesses thus business owners choose this type of loan for their business.

Bridge Loan Definition

Bridge loan is a short term arrangements of loan that are usually used for borrowing money in the anticipation of the arrival of a larger loan in just a short period of weeks to several months. Bridge loans are also available for individuals as well as businesses and have variation of uses. For further understanding of this bridge loan, it is a type of loan that is used for bridging the gap of your current financing needs and the pending arrangement of larger loans. Since it is a short term arrangement, bridge loans are typically more costly in terms of the borrowing rates. For example; a home buyer wants to fund the down payment of their new home while he still owns the old one so he would avail the bridge loan. He would technically be carrying 2 mortgages simultaneously. Nevertheless, it is also temporary and both principal balance and interest must be paid when the old home of the buyer sells.

How to Qualify for a Bridge Loan?

There are some things needed to qualify for a bridge loan:

  • Buyers have still the first mortgage on

    the present or old home that will be sold

  • For just a short time, the buyer will be owning 2 homes
  • Buyers need to move up the purchase of their new home before they sell the existing residences.

Lenders are the one that determine the rates however they should follow their nation’s bridge loan’s estimate to prevent problems in the future. For example, you have 8.5%. This will not carry payments up to 4 months however, the interest will be due and accrue when the property is sold out and the loan is paid. Fee examples are:

  • Appraisal fee
  • Escrow fee
  • Title Policy fee
  • Notary fee
  • Recording fee
  • Wire fee
  • Courier fee
  • Drawing fee
  • Loan origination fee

Regardless of the type of bridge loans that you have acquired, you will be set with due dates and payable dates by the lending company. Generally, most lenders give up to 6 months so if your old home is not sold at that time then you will have to ask for extension. Thus, you definitely need to sell your old home at that time frame and pay the bridge loan immediately after your home is legally purchased. Seek advice from your agent so that your old home can be sold in just a short time.

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