A bridge loan is a brief borrowing against the equity in your present home that you use to put a down payment on a new house. If you need additional funds to purchase a new home before selling your present one and want to make an offer without it being contingent on your home selling first, a bridge loan can be helpful.
To decide if bridge loans are a good fit for your home-buying circumstances, learn how they operate, their expenses, and their benefits and drawbacks.
Table of contents
- What Is A Bridge Loan?
- How Does A Bridge Loan Work?
- How To Get A Bridge Loan To Buy A House
- How To Repay A Bridge Loan
- Pros of bridge loans
- Cons of bridge loans
- When Do I Need A Bridge Loan?
- Where Can I Find Bridge Loan Lenders?
- Are There Alternatives To Bridge Loans?
- Conclusion
- FAQs On Bridge Loan
- References
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What Is A Bridge Loan?
A bridge loan is a brief loan to cover the time between purchasing a home and selling your current one. Sometimes you wish to buy before you sell, which means you won’t have the sale proceeds for the down payment on your new house.
This could be difficult if you were counting on that money to buy your new house. In the interim, you can qualify for a bridge loan to pay for a property purchase.
How Does A Bridge Loan Work?
A bridge loan functions somewhat similarly to a typical mortgage. The lender evaluates your income, assets, and credit to determine your eligibility and requests an assessment to establish the worth of your home.
However, there are a few significant variations:
You’ll need to choose whether the loan is a first or second mortgage
One mortgage allows you to borrow more money than you now owe and keep the difference; a second loan allows you to borrow less money using some of the equity in your property. Each operates as follows:
- First-mortgage bridge loan. Your mortgage balance plus a down payment is offered to you by a lender in the form of a loan. You have paid off your current mortgage, therefore the bridge loan now takes precedence until you sell your present house, at which point you repay the loan.
- Second-mortgage bridge loan. Your new home’s down payment financing is provided by a lender. A second mortgage is a loan that is backed by your present residence.
You’ll typically be able to borrow up to 75% of your home’s value
You won’t be able to use the entire value of your house if you take out a bridge loan, whether it be for a first or second mortgage. If you don’t have more than 20% equity in your home, a bridge loan might not be wise.
You may have options for how you make your monthly payment
You may make fixed monthly payments, interest-only payments, payments only when the house is sold, or other arrangements depending on the lender’s terms.
You’ll pay closing costs and possibly have a prepayment penalty
The closing expenses for a bridge loan might range from 1.5% to 3% of the loan amount. In addition, the interest rate on a bridge loan might range from 8% to 10%, depending on the loan amount and your credit history. Avoid any lender who requests a deposit up front for a bridge loan; you’ll pay all fees after the mortgage closes. For a prepayment penalty, check the terms of your bridge loan.
How To Get A Bridge Loan To Buy A House
Your debt-to-income ratio, the amount of home equity you have, your credit card score, and possibly your household income are among the basic criteria your lender will consider when determining your eligibility for a bridge loan.
It is advantageous if you qualify for a mortgage on your first property. It could be difficult to qualify if you don’t have a sizable amount of equity in your current residence. You might go through a quick approval procedure for a bridge loan than you did for a conventional mortgage if your lender believes that you are an excellent candidate.
How To Repay A Bridge Loan
A bridge loan lasts for around a year before you start making payments. It’s better to arrange things so you may pay back your bridge loan with the proceeds from the sale of your house.
There is typically a final due date for when the entire debt must be repaid. It’s crucial to agree on the terms of repayment with your lender and to be certain that you understand what needs to be done next.
Pros of bridge loans
- A plus in a seller’s market. A bridge loan may make your application more competitive if the market is hot and you are up against many other purchasers. Any financial stipulations in your offer may be removed with the help of a bridging loan. Having a higher certainty that the sale will go through makes this valuable to a seller.
- If you contribute 20 percent or more toward your down payment, you can avoid paying private mortgage insurance (PMI). Without a 20% down payment, PMI is necessary, which increases your monthly mortgage payments.
- Rapid financing In order to avoid having to sell your current home before buying your next one, a bridge loan may be easier to qualify for..
Cons of bridge loans
- Higher interest rates. The lender must charge higher rates for bridge loans because they are transient fixes. The increased interest rates make it profitable for the lender to lend the money.
- A bridge loan will ultimately cost you more money as a homeowner. The bridge loan is a financial tool that might be valuable or essential at the time, but keep in mind that the interest and other costs you pay are cash out of your own pocket and are not refundable.
- A pair of mortgage costs. You will begin repaying the bridge loan along with your actual mortgage once it closes.
- If your finances don’t fulfill the requirements of the lender, it could be difficult to qualify for.
Depending on your financial status and where you are in the purchasing and selling process, applying for a bridge loan can be advantageous.
When Do I Need A Bridge Loan?
In brisk competitive real estate markets, a home bridging loan makes the most sense. You might use a bridge loan to submit a contingency-free offer if the sellers won’t accept them.
Other situations where a bridge loan might be useful include:
1. A new home purchase in a hyper-competitive market
Sellers are less likely to accept an offer contingent on the sale of your home when there are other bidders for the property. A bridge home, on the other hand, might be able to help you get enough money to bridge the gap until your home sells if you need the money from your present home to make your new-home payment manageable.
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A fix-up home purchase
A bridge loan might be useful if the property you’re buying requires considerable renovations but those repairs don’t conform to standard loan requirements. For instance, the HomeStyle® Renovation loan from Fannie Mae imposes a cap on renovation funds of either 75% of the appraised value of the property “as-completed” or 75% of the purchase price plus renovation expenditures.
A bridge loan can provide you with the additional funds you need to finish the repairs without taking money out of your savings if those limits don’t provide enough money to buy and fix up the house.
A fix-and-flip home purchase
If you’re fixing up houses to sell, a bridge mortgage can also make sense. Flips are meant to be done quickly, and if all goes according to plan, you should be able to pay back the loan after the renovations are done. A bridge loan can make it possible for you to close on a house more quickly than with other types of financing.
Where Can I Find Bridge Loan Lenders?
Since bridge loans are a niche product, not all lenders provide them. Find out if the lender you’re working with to buy a new home offers bridge loans. If not, take into account the following:
1. Regional banks and credit unions
Inquire about bridge loans from your current local bank. Local banks and credit unions provide individualized services and are knowledgeable about the real estate market in your area, even if you don’t bank with them.
2. Non-QM lenders
Bridge loans and other alternative mortgage products are a specialty of non-qualified mortgage (non-QM) lenders. Interest-only and balloon payment arrangements are examples of non-QM loan features that are not permitted in qualifying mortgages.
3. Lenders of hard cash
Bridge loans and other loans with brief payback terms are provided by hard-money lenders, which might be an individual or a group of investors. Although their interest rates are typically higher, their credit standards might not be as strict. Before collaborating with a lender, make sure they are respectable.
Are There Alternatives To Bridge Loans?
When you want to purchase a new house but still have obligations related to your current one, a bridge loan may seem like a practical alternative. But they do come at a price.
Here are some possible alternatives to bridge loans you may want to consider.
1. Home Equity Line of Credit (HELOC)
You can borrow money using the equity you have in your home with a home equity line of credit or HELOC. In that, you might be accepted for a particular amount, but you only ever pay interest on the amount you actually spend at any one moment, it is somewhat similar to a credit card.
Additionally, you might be eligible for a loan with a cheaper interest rate than a bridge loan. However, some lenders won’t issue one to a house that’s already for sale, so you might have to get the HELOC before you put your house on the market. A HELOC can be used for home renovations as well.
2. Home Equity Loans
With this type of financing, you can borrow money against the equity in your current house by using it as security. Long-term, up to 20-year home equity loans frequently have lower interest rates than bridge loans. With this kind of financing, you can still be required to carry two mortgages.
3. Personal Loan
You might be eligible for a personal loan if you’ve maintained a good credit score, have a proven track record of reliable work, and make your payments on time. These are backed by private resources. Lenders will have different terms and conditions.
4. 80-10-10 Loan
This is a method of avoiding PMI and putting down less than 20% on a new property. In this type of financing, you put down 10% and get two mortgages—one for 80% of the cost of the new house and another for the remaining balance. Any monies left over after paying the remaining sum from the sale of your present home can be applied to the smaller 10% mortgage on the new home.
Conclusion
If you find yourself in a situation where you need to urgently purchase a new house, a bridge loan may be helpful. However, while a bridge loan can get you out of a jam or speed up the process of buying a much-needed new property in a competitive market, it can also make an expensive transaction possible.
FAQs On Bridge Loan
You could think you qualify for a bridge loan if you’re looking to buy a second home before your first one sells and have previously been a strong mortgage candidate. The borrowing procedure, though, might feel distinct from the home loan procedure.
To qualify for a real estate bridge loan, you need to have a good credit score. Most lenders prefer those with low debt-to-income ratios.
A bridge loan gives you the ability to make a contingency-free offer on a new house. Fewer contingencies can increase the likelihood that the seller would take into account your offer when they have received several offers in a competitive housing market.
Bridge loans can be very expensive because you have to pay a higher interest rate as well as the costs of a second mortgage. The duration of a bridge loan is another issue. Because it’s short-term, you’ll have to make a speedy repayment. If it takes longer than you anticipated to sell your house, this could be particularly unpleasant.
References
- chase.com – Bridge loans: Everything you need to know
- Investopedia.com – What Is a Bridge Loan?
- Quickenloans.com – Bridge Loans: What They Are And How They Work In Real Estate
- Lendingtree.com – What Is a Bridge Loan and How Does It Work?
- Unbiased.co.uk – Bridge loan financing: everything you need to know
- Rocketmortgage.com – What Is A Bridge Loan And How Do They Work?
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