A bridging loan is a quick or short-term loan that you can get to meet a current need before you obtain permanent financing. Gap funding is common in the real estate industry. If you’re in the process of selling your old property to buy a new one, but it’s taking longer to get a buyer, then this can help.
The loan is processed within two weeks and is repaid within six months to a year. Other names for this type of financing are caveat loan, gap financing, or swing loan.
How Bridge Land Loans Work
Land purchase can be quite competitive. A good plot may have many buyers. On the other hand, auctions demand an immediate deposit and full payments within 28 days from the date of purchase. For this reason, a land bridging loan becomes handy to acquire property fast.
This credit is taken on grounds that have no structure on them. It may have been previously used for storage, agriculture, or could be a wasteland. However, it must have the potential to be developed. Buyers who intend to buy such grounds to later resell to developers or build on these can consider this kind of financing.
Borrowers can acquire this loan before they obtain planning permission. Upon receiving this formal document, they can now build a new structure or do with the land as they please. The document also helps them refinance for construction. They can sell the plot to a different developer as the planning permission increases property value.
Features Of A Land Swing Loan
A swing credit is provided by a mortgage lender, some banks, or other specialist lenders. There are different types of bridge loans. These are the open, closed, first charge, and the second charge bridging loans. They serve the same purpose, but vary in term, repayment method, and interest rate.
Even so, bridge loans have similar characteristics. Some major ones are:
- Fast acquisition time
- They are repaid in equated monthly installments
- Due to the high-risk nature of the loans, the lender requires collateral
- The loans are short-term and are repaid within a year or less
- A good repayment capability and credit score are needed to acquire this.
These loans are quite beneficial. The process is fast, and you get funds within a fortnight. This quick cash can allow you to secure a good piece of land which may not be possible without cash at hand.
However, some drawbacks come with this kind of financing. The interest rates are usually high, and the payments are huge as the repayment period is short.
How To Raise Your Eligibility For A Bridge Land Loan
Land bridging loans can be advantageous if properly used. If you’re considering a bridging loan for a plot, lenders will be looking for a few factors to identify if you qualify for one.
Here are a few things that can improve the chances of acquiring gap financing:
1. Ensure A Good Credit Score
A good credit score will increase your chances of getting a swing loan. Various factors determine your credit score. Some of these are your payment history and how you use your credit. The debts you owe also play a major role in determining your credit rate. You can utilize online calculators to examine your score.
All lenders don’t have a standard rate to give you a loan. Each requires a different score, unlike the others. Nonetheless, every one of them needs a rate between 700 and 800. This range is considered excellent or good for approval.
2. Have 20% Equity
Swing loan lenders often give you 80% of the value of the property you intend to buy. Having the remaining 20% in equity or cash ensures a higher chance of getting a bridge loan.
3. Low Debt-To-Income Ratio
Your debt-to-income (DTI) ratio is calculated by getting the percentage of monthly gross earnings used to pay all monthly debts. Lenders require a low DTI ratio to qualify for a loan. If you score a 20% ratio or less, then this is considered low and good. If you’re at 40% and above, then this may indicate financial strain.
Your DTI rate proves that you can manage the short-term loan. If you have another existing loan, then a low score shows that you can manage the two loans without strain.
A bridging loan for land can help move your project to the next level. It’s fast to acquire and has shorter payment periods. For you to qualify for one, lenders will require a good credit score and a low DTI ratio. If you have 20% of the value of the field you want to purchase, then you’re likely to get a loan.
If you need further clarification, contact a land swing loan expert. It could be your bank or mortgage lender.