There is a large variety of home loans that suit the needs of many different buyers. However, there is one particular loan that helps those who are trying to buy and sell a home at the same time, it’s called a bridge loan.
What Is A Bridge Loan?
As the name suggests, the loan acts as a “bridge” and allows you to purchase a new home by using your old one as collateral. This loan is also known as a “wrap” or “gap financing.” Bridge loans are a lifeline for homeowners who are eager to purchase a new home before they have sold the home they are currently in. If you are still strapped to your old home it can be difficult to get a loan for a new one. While some lenders may be reluctant to grant a new loan for that second home, they also know the odds are good that you will sell your first home soon. So this bridge loan helps span that gap.
How Bridge Loans Work
Typically, you can finance up to 80% of the combined value of both homes. So, if you are selling your home for $200,000 and buying another one for $300,000, you can borrow $400,00 max. As for the remaining $100,000 you will need to have that in home equity, down payment savings, or some combination of the two. Once your home sells, you pay off the bridge loan and then apply for a new mortgage to finance just your new home.
Thankfully, bridge loans take a shorter time to process than conventional loans. You can expect to get approved within a few weeks versus a few months. However, since these loans typically only last a few months to a year (however long it takes to sell your old home) lenders can’t make that much money off of the interest so they usually charge higher fees. In the current market, bridge loan interest rates can range from 6% to 16%.
The idea is to pay the bridge loan off as quickly as possible, but some lenders have a prepayment penalty while others don’t, so be sure to read the fine print. Plus these loans come with substantial origination fees. Consider it the price you pay for the convenience and short term of the debt.
The Pros & Cons
The biggest advantage is that you make an offer on the home you want without a financing contingency. Which means that you will only buy the home if you can secure a mortgage. The bridge loan guarantees the cash to close the deal.
These loans are rare because they require a near perfect credit score and a low debt-to-income ratio because they do come with substantial risks. The real estate market is an ever changing entity and even though you are pretty sure your old home will sell fast it is never a sure thing. Worst case scenario your home never sells and then you are stuck paying high rates. Plus if you can’t pay up once the loan come to term, you could end up losing your home to foreclosure. Most lenders are willing to extend the deadline on a bridge loan, but not forever.
Is a Bridge Loan Right For You?
Getting a bridge loan really depends on the current real estate market that you are in. It is a good gamble if it’s a hot seller’s market, where you are reasonably assured that it will sell in a short time. However, if you are in a buyer’s market, where you home could sit for a months or years a bridge loan is not for you. It would be much wiser to sell your house, rent something temporary until you find the home you want. So even though you will have to move twice you won’t have to deal with the stress you would face when the clock is ticking on a bridge loan.
