A bridge loan is a short-term loan secured by your current home. In the event that your existing home does not sell before closing, it "bridges" the gap between the sales price of your new home and your new mortgage on that residence.
Bridge Loans: Definition and Examples
If your existing property does not sell before you close on your new home, a bridge loan is a temporary loan secured by it. Bridge loans bridge the gap between the purchase price of your new home and the amount you owe on your new mortgage. A buyer typically takes out a bridge loan to allow them to purchase another home before selling their current one to raise funds for a down payment.Bridge Loans and How They Work
You must submit an application to a lender to obtain a bridge loan. Not all lenders have set a minimum FICO scores or debt-to-income ratios for bridge loans. Underwriting is more of a "Does it make sense?" approach when it comes to funding. The long-term financing obtained on the new home is the piece of the puzzle that requires guidelines. Some lenders may exclude the bridge loan payment from qualifying for conforming loans. By combining the existing mortgage payment on their existing home, if any, with the new mortgage payment on the move-up home, the borrower qualifies to buy the move-up home. Because most buyers have existing first mortgages on their current homes, many lenders qualify the buyer for two payments. The buyer will most likely close on the move-up home before selling their current home, resulting in them owning two homes, albeit for a short time. Lenders have more leeway to accept a higher debt-to-income ratio if the new home mortgage is a conforming loan. They can use an automated underwriting program to process the mortgage loan. Most lenders will limit the homebuyer's debt-to-income ratio to 50% if the new home mortgage is a jumbo loan.Bridge Loans: Benefits and Drawbacks
Pros
- A homebuyer has no restrictions on purchasing a new home while simultaneously selling their existing home.
- You might be able to get a few months without having to pay anything.
- Even after removing the contingency to sell, you may still be able to purchase a new home in certain circumstances.
Cons
- The cost of a bridge loan is usually higher than the cost of a home equity loan.
- You must be able to meet the requirements to own two homes.
- Managing two mortgages and a bridge loan at the same time can be stressful.
Explained Advantages
A homebuyer has no restrictions when it comes to buying a new home and selling their old one: When you use a bridge loan for a real estate transaction, you can use the equity in your existing home to buy a new home right away without having to wait for the old one to sell. You might be able to get a few months without paying anything: Bridge loans give homeowners the option of paying when they have the money, at least for a limited time. Even after removing the sale contingency, you may be able to purchase a new home in certain circumstances: If a buyer makes a contingent offer to buy and the seller issues a notice to perform, the buyer can remove the contingency to sell from their offer contract and still move forward with the purchase. Many sellers will turn down such a conditional offer in a seller's market. Your move-up offer will be more appealing if you have a bridge loan.Explaining the Drawbacks
A bridge loan is usually more expensive than a home equity loan: You may end up paying higher interest rates on a bridge loan than on a home equity loan. The rate will typically be around 2% higher than a 30-year fixed-rate mortgage. To own two homes, you must meet the following criteria: Some people may not be able to qualify for two mortgages at the same time, so that a bridge loan may be out of the question. It's difficult to manage two mortgages and a bridge loan at the same time: When making two mortgage payments while also paying interest on a bridge loan, some people become stressed. It's even more stressful if the house they're trying to sell isn't selling.Bridge Loan Fees on Average
Interest rates fluctuate, and terms differ between lenders and locations. A bridge loan, for example, may have no payments for the first four months, but interest will accrue and be due when the property is sold, and the loan is paid off. In addition, different types of fees have different rates. On a $10,000 loan, an administration fee of 8.5 percent and an appraisal fee of 4.75 percent might be charged. There will be some fees that are more expensive than others. The following are some examples of bridge loan fees based on a $10,000 loan:- Fee for administration: $850
- Fee for appraisal: $475
- $450 escrow fee
- Fee for title insurance: $450+
- Fees for wire transfers: $75
- Fee for a notary: $40
Bridge Loan Alternatives
If you don't have the cash for a down payment and your current home hasn't sold yet, you can fund a down payment for the move-up home in one of two ways. A bridge loan, a home equity loan, or a home equity line of credit can be used to finance a bridge loan. In either case, it may be safer and more financially prudent to wait to sell your current home before purchasing a new one. Consider what you'll do if your current home doesn't sell in a reasonable amount of time. For the time being, you could be financially supporting two households. The main advantage of a bridge loan is that it allows you to avoid making a conditional offer like "I'll buy your house if mine sells." However, you should only do this if you're confident that your home will sell or if you have a backup plan in case it doesn't.Important Points to Remember
- Homebuyers can use a bridge loan to close on a new home before selling their current one.
- Bridge loans have higher interest rates than home equity loans and can cost tens of thousands of dollars to set up.
- Even if the buyer intends to sell their current home, they are technically owning two homes at the same time, and lenders will assess their qualifications before issuing a bridge loan.
