What is a bridge loan and how does it work? (Podcast)

Bridge loans can be a powerful tool for homebuyers — particularly those looking to sell a property and buy a new one with ease. They’re also great for investors or for retired homeowners looking to downsize or move closer to family and friends.

Mortgage expert Arjun Dhingra recently covered the topic on an episode of The Mortgage Reports Podcast, along with help from Sofia Nadjibi, president of Golden Gate Lending Group.

Are you a property owner on the hunt for your next home or investment? Here’s what the pair talked about — and how bridge loans may be able to help you achieve your goals.

Listen to Arjun on The Mortgage Reports Podcast!

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What is a bridge loan?

A bridge loan is just what it sounds like — a bridge between one property and the next.

Bridge loans are equity-based mortgage loans. While lenders do look at your income and other debts, that’s not how they qualify you for these mortgages. Instead, they consider the property itself — namely, its current market value and how much equity you have in it. Typically, bridge loans require you to have at least a 50% equity stake to qualify.

Here’s how Nadjibi explained it on the podcast: “When someone owns a property that has equity, you want to take that equity and move it into another property. That’s a bridge loan.”

The benefits of bridge loans

The big perk of a bridge loan — especially in today’s hot market — is that it allows you to buy a new property without selling an existing home first.

This can help you avoid home sale contingencies and, perhaps more importantly, give you a bigger sum of cash to put toward the new home. Then, you can switch to a more traditional mortgage later on.

Just note that bridge loans have significantly higher interest rates than mortgages. So if you’re counting on one to buy your next home, you’ll want to have a plan for switching to a lower-rate mortgage within a few months.

Bridge loans in today’s housing market

According to Nadjibi, bridge loans have become quite popular since the pandemic began.

“I think the biggest thing that we saw over the pandemic is that so many people had lifestyle changes,” Nadjibi said. “They looked at their home in a very different way. They looked at a home as a place where they wanted to bring their family together, cook, and enjoy the backyard. They needed that extra office space to be able to do Zoom calls and for the kids to be able to do school, so they needed more space.”

As a result, more existing homeowners started looking for new properties. Some began eyeing larger homes with additional space or bedrooms, while others looked at different locales, thanks — at least in part — to remote work flexibility.

But still, the traditional challenges of selling and buying simultaneously remained. And with incredibly stiff competition, acting fast was critical. Bridge loans helped solve both these issues simultaneously.

Bridge loans can compete with cash offers

“We were able to help a lot of people, especially families, that grew out of their space,” Nadjibi said. “With a bridge loan, as long as they had that equity in the home that they lived in, we were able to help them without moving. They could stay in the comfort of their home, get pre-approved for the bridge loan, and be out there shopping. And once that right home came around, they could go in with a cash-like offer, no contingencies.”

That last part is key, Dhingra said.

“A lot of buyers have been frustrated over the last decade competing with cash offers. They say, ‘Well, I get priced out because there’s somebody always coming in with cash, or another cash offer beat me out,’” Dhingra said. “Bridge loans can function as good as a cash offer in these situations.”

Who should use a bridge loan?

According to Nadjibi, three types of buyers can really benefit from using a bridge loan: investors, retirees, and existing homeowners.

Let’s look at the benefits to all three groups:

• Investors: Bridge loans allow investors to use the equity in their existing investment properties to purchase additional ones. They also allow them to act fast in a hot market and give them cash-like offers to stay competitive
• Retirees: Since retirees are often on a limited income, traditional mortgage loans can be harder to qualify for. Equity-based bridge loans can be a good alternative, particularly if they’ve been in their current home a while and have lots of equity
• Existing homeowners: Bridge loans let existing homeowners shop with ease. They can use the loan to submit non-contingent, cash-like offers as they wish and then worry about selling their existing property later on — after they’ve closed and moved into the new home

“What’s so great is they don’t have to change anything in their regular life,” Nadjibi said. “So they don’t have to try to move into a short-term rental. They can stay in the comfort of their home, get approved, and then just be ready out there looking because they’re approved for the bridge loan.”

How to get a bridge loan

The bridge loan process is a quick and painless one, according to Nadjibi. Borrowers can be fully approved and ready to start shopping in just a few days, and loans can often close in a mere 17 days.

Here’s what the bridge loan process looks like at Nadjibi’s company:

1. Initial consult: You’ll talk with a loan officer about your goals, and they’ll help you devise a loan strategy that works for your unique situation
2. Application and documentation: You’ll fill out a secure application and submit any required documents. Bridge loans typically require less documentation than traditional mortgages, though you’ll still need some. You can expect to need lots of property-related documents (mortgage statements, insurance policies, etc.)
3. Underwriting and approval: Your application is sent to underwriting and typically approved in less than 24 hours. You can then begin making offers on properties as you wish
4. Closing: Once you find a place, make an offer, and go into contract, your loan can move toward closing. This can take as little as 17 days from start to finish

Once you’ve moved into the home and sold the previous one, you’ll usually want to restructure the loan and move into a more traditional mortgage. (This will reduce your rate and make monthly payments more affordable).

According to Nadjibi, the typical borrower is in a new loan within around 45 days.

“The goal is to kind of get into the new property and get out of this bridge loan as quickly as possible,” she says.

Learn more about bridge loans

If you want to learn more about bridge loans or are considering using one for your next home purchase, get in touch with a mortgage expert today. They can help you make the right decision for your goals.