More often than we would think, new home buyers will find their dream property before their current property has been sold. Since many homeowners cannot afford to purchase a home outright, they often use the funds from the sale of the current home to pay for their new property.
While this may seem logical, it is possible for the homeowners dream property to be sold right out from under their noses before they have the financing available to purchase it themselves. Although these situations may seem hopeless, utilising a bridging loan to be able to make that new home purchase is possible.
Know the Logistics before Applying
While there may not be a lot of time to secure the financing needed to purchase a dream property, it is still important to think about how much funding is truly going to be needed to make your dream a reality and this is especially true when applying for a bridging loan.
First, consider and decide how much funding is really needed to make the purchase and also decide if you wish to secure the loan for just the price of the property itself or if you wish to be able to finance the closing costs, legal fees, and other incidentals.
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Once a set amount has been determined, it is always important to shop around for different lenders to make sure you are receiving the best interest rate and repayment terms.
In many cases, lenders who offer bridging loans will put a maximum limit on the amount of funds they are willing to extend to an applicant as well as a minimum amount they will extend to make their investment worthwhile.
Looking at these minimum and maximum requirements as well as outlying interest rates and other terms of the loan will often help you to rule out potential lenders. A good way to combat minimum loan amounts is to include additional costs in to the calculation of how much you need.
It is crucial to remember that shopping around for different lending options gives you the best possible chances of finding a bridging loan that will work for you.
Calculate How Long You Will Need the Financing
Another important aspect to consider is the amount of time the loan will be needed in order to make the purchase as well as pay off the bridging loan. Many applicants will use the sale of their current property as the exit strategy for paying off the loan – even if you do not have a set sale date of the current property, you will need to give the lender a timeframe in which you think it will sell.
Bridging loans were created to help applicants “bridge the gap” between their current financial situation and securing long-term funding – because of this, bridging loans tend to have much higher interest rates and it is best to pay them off as quickly as possible and not use them as a long-term financial solution.
Information on Loan to Value and Bridging Loans
Bridging loans that are used for property purchase are considered a secured loan, which means that the financing will need to be secured in some way. Most traditionally, the Loan to Value or LTV of the property being purchased will act as the security for the loan.
Just like with traditional, long-term mortgages, lenders will set a maximum LTV percentage for the bridging loan and the property being used. Generally, the LTV for bridging loans falls right around 75 percent, meaning that the applicant will then have to provide the additional 25 percent of the loan through his or her own means.
Based on the situation, it is possible for lenders to offer a higher LTV. It is important that you are confident that you will meet the lender’s borrowing criteria before applying and also look around for the best deals.
Additional Costs Associated with Arranging a Bridging Loan
There are some additional costs associated with applying for and securing a bridging loan. The first, and most common, is the monthly interest rate that lender will charge a borrower for using the funding.
Since the general terms of a bridging loan are much shorter than traditional loans, the interest rate tends to be much higher in order to make the investment worthwhile for a lender, which is why bridging loans are a more expensive way to borrow money.
There are also other fees that come along with using a bridging loan which may include arrangement fees and variation costs, to name just a couple. It will also be required of the applicant to secure his or her own solicitor, so it is important to take all of these fees into account.
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Many homeowners have felt the heartbreak of having their dream home purchased out from under them simply because they do not have the financing to make their dream a reality. While bridging loans may be an expensive way to bridge the gap between the sale of your current home and purchasing a new home, it is a quick and easy way to make that purchase possible.
Remember, before applying for a bridging loan, it is always a good idea to sort out the details of what is truly needed and shop around for the best possible deals. There are a number of lenders specialising in bridging loans and with a little research, you should be able to find a lender willing to work with your unique situation.