How Development Finance or Bridge Loans Would have been Helpful

Biphoo

8 May 2017

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How Development Finance or Bridge Loans Would have been Helpful

If you have ever been stuck in between the purchase of your new home and the sale of your old home, understanding Bridging Loans would have been helpful. Paying two mortgages can be challenging, especially when it is not planned. Luckily, bridge loans were created by financial institutions to help solve this challenging situation.

Bridging loans are temporary Best Short Term Loans that assist to bridge this time frame between the sale of the present property and the purchase of the new property. Despite this not being a common scenario, under a few circumstances there is an extended time frame than was initially anticipated. The bridge loan helps the property owner to cover their dual mortgage payments, with the proceeds from the development finance being used for the down payment on the new home once closing occurs.

As with the same process for a home mortgage, the buyers must go through underwriting to become approved for these bridging loans. Every lender will generally have their own underwriting guidelines that must be followed in order for the property owner to be approved for the bridge loan. And, these standards are generally more lenient than traditional home lenders when it comes to debt to income ratios, meaning that these ratios can often be higher than with Traditional Mortgage Loans.

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The rationale of different requirements associated with a development finance is that they are temporary and purely designed to assist a buyer in transititioning from their current home into their new home. And, the proceeds from the bridge loan are almost always applied to the New Property Loan in the event that they are not consumed during the waiting period prior to closing on the new home.

Benefits of Bridge Loans

There are several advantages to the property buyer of bridge loans, including:

It allows the property owner to place their home onto the market faster than normal and often with fewer restrictions than if they didn’t have the additional financial cushion.
Many bridge loans don’t require monthly mortgage or loan payments, giving some financial assistance to the existing home owner.
The bridge loan can provide the property owner some flexibility with restrictions on their home sale, allowing them to turn away offers that are not favourable without financial worry of paying two loans in the event that their new property closes as anticipated.The Downside of a Bridge Loan when Buying a Home

While there are multiple advantages to using a bridge loan when selling or buying properties, including:

The costs associated with bridge loans are generally higher than traditional home loans and even home equity loans.
Some home owners may not be approved for a bridge loan due to the lending qualifications
Even though the bridge loan assists the home owner in covering mortgage costs during the transition time between properties, they must still financially cover for both loans and the interest that is accruing on the bridge loan.