A bridge loan is generally a great option if you require some financial assistance for a brief period of time to conclude the purchase of a house. The idea behind a bridge loan is that it gives you time to complete the purchase and arrange permanent financing. If you have poor credit, you may be wondering whether a bridge loan is an option open for you. Our home loan experts here at Titan Funding can give you some advice.
What Is a Bridge Loan?
A bridge loan is a type of short-term financing to help you cover your expenditure needs when buying a home. Residential bridge loans can last anywhere from around six months to two years. They typically have higher interest rates than standard loans, since lenders view these types of loans as a greater risk than longer-term lending.
Standard home loans often last between 20 and 30 years. They are taken out by borrowers to fund the total cost of purchasing a home. Arranging a home loan can take some time since you need to present documentation and have your application assessed.
If you already own equity in a home, you can use it to take out a bridge loan. This is an attractive option if you want to make a down payment on a new home, but don’t yet have long-term financing in place to fund it. As a general rule, you can borrow up to 80 percent of the equity you currently hold in your home.
Bridge loans are especially useful if you want to buy your new home before selling your old one. This approach is attractive, because it allows you to secure your future residence before you give up your current one.
Bridge loans can also make your offer appear more attractive to a seller since it provides added financial security to the deal. Finally, these loans can help you make a 20% down payment on your new home. If you can put down 20%, you’ll avoid having to buy private mortgage insurance, which is an extra cost you’ll otherwise have to pay each month.
What Is a Bad Credit Score?
Your credit score is recorded on the FICO scale. According to Experian, one of the big three credit rating agencies, any FICO score below 670 is considered subprime credit. Scores between 580 and 669 are deemed “fair,” while anything below 579 is considered “poor.”
The lower limit for obtaining a conventional home loan is typically a credit score of 620. If you’re considering applying for a government-backed loan, which is a popular option among first-time buyers, these loans have a lower limit of 500.
Can You Get a Bridge Loan With a Low Credit Score?
Due to the fact that bridge loans are considered to come with a greater risk than standard home loans, some lenders may be reluctant to offer one to someone with bad credit. However, it is possible to get a bridging loan with subprime credit.
You should keep in mind that if you successfully get a bridge loan with bad credit, you’ll likely have to pay a high interest rate. This is not only because of the increased interest charged on bridge loans compared to standard loans but also because lenders will want a higher premium to protect them from the additional risk of lending to a subprime borrower.
One of the things you’ll need to do in a successful bridge loan application is show the lender how much equity you have in your existing home. In addition, they’ll want to see proof of your income and your debt to income ratio. To strengthen your case, you could present a detailed account of your financial history to explain any problems you’ve previously had. This history could include a plan on how you intend to pay back the loan, which will help build the lender’s confidence in your reliability.
Your credit score is only one piece of the information used by lenders to decide whether to offer you a bridge loan. That’s why providing additional details about your financial background and future plans could tip the balance in your favor.
What Options Do You Have if You Can’t Get a Bridge Loan?
If you’re struggling to secure a bridge loan, you may need to take some steps to boost your credit score. Luckily, there are some steps you can take to increase your score within several months.
One of the key things you should do is make regular payments on your credit cards and any other outstanding debt. Making payments is important because they will be reported to the credit rating agencies, which will improve your score as you show your ability to pay back your debt regularly.
Another option is to consider an alternative to getting a bridge loan. If you can’t qualify, you may want to try building up your savings so you can cover the cost of a down payment on a new home yourself. Funding your down payment out of your own savings rather than a bridge loan comes with the advantage of avoiding interest rate payments.
How Do You Repay a Bridge Loan?
One of the most popular ways to repay a bridge loan is to use the funds you generate from the sale of your home to cover the cost. Bridge loans typically have a final due date by which all the funds must be paid back, so it’s important that you communicate with your lender to ensure that this schedule is followed.
Learn More About Bridge Loans at Titan Funding
If you’re interested in a bridge loan or you have further questions, our team of financial experts are here to help. One of our team members can talk you through the application process, the pros and cons of bridge loans, and any other home-financing queries you may have. To get started, don’t hesitate to contact us today. We have extensive experience in providing various types of residential and commercial loans to customers in Miami and throughout Florida. We’d be delighted to welcome you as a new or returning customer.