You are looking to buy a home in what is arguably the hottest market in nearly two decades. You keep finding houses you like, but every time you make an offer contingent on selling your existing home, you get beat out by another buyer ready to pull the trigger. Multiple people have suggested that you apply for a retail bridge loan. Yet you have heard bridge loans are tough to get.
What you’ve heard is correct. Bridge loans are very difficult to get, at least in a retail setting. Private bridge loans are much easier to obtain. However, they will not help you. Private bridge loans are made to developers, investors, etc. for commercial real estate transactions. Any bridge loan you hope to get will have to go through your bank.
Income and Assets
The differences in how banks and private lenders approach bridge loans sets the stage for why retail bridge loans are so hard to get. Your bank will not approve a bridge loan for your new home without putting you through the standard approval protocol. They will look at all the same things a mortgage lender would look at. We are talking W-2 income, debt load, credit score, etc.
Private lending is asset-based lending. That means lenders are concerned primarily about the value of the asset being acquired. When a lender like Salt Lake City’s Actium Partners does look into credit score and debt loads, they do so mainly to determine interest rates. Approval is based almost exclusively on the value of the asset at hand.
Retail Bridge Loan Requirements
Now that you know the biggest difference between retail and private bridge loans, discussing typical retail bridge loan requirements should give you a fuller understanding as to why loans are tough to get. Nearly every bank is going to look closely at the following before approving a retail bridge loan:
- Total Income – Obviously, banks look very closely at borrower’s income. This includes everything from W-2 income to self-employment income from a side gig. Banks want to know about every dime earned.
- Debt Load – The other side of the income coin is debt load. Banks look very closely at a client’s debt as compared to total income. Borrowers need to have adequate income and a comparatively low debt to qualify.
- Debt Ratio – A consumer’s debt ratio is essentially a comparison of their current debt load against their available credit. Banks require a low debt ratio in order to qualify. A high debt ratio definitely makes a bridge loan way too risky.
- Excellent Credit – Banks almost always require excellent credit to obtain bridge loans. They need to know consumers have a track record of paying their bills – and paying them on time.
- Adequate Equity – Because retail bridge loans are designed to help consumers buy new homes, banks want to see adequate equity in the home being sold. The higher the equity, the greater the chances of approval.
As with a traditional mortgage, consumers are expected to put some skin in the game. So if a lender’s LTV is 80%, the consumer would have to come up with the remaining 20% as a down payment. Note that this is one instance in which banks are not flexible. A 20% down payment is standard. Some banks may require more.
Retail bridge loans are tougher to get because banks still have to apply the same lending criteria on a loan that is considerably more risky. Private lenders work on a different set of standards. Their bridge loans are easier to attain because they are asset-based.