How Do Bridge Loans Work?
You have found the house of your dreams! It’s in the right price range and has everything you have been looking for. You’ve got an offer on your house, things are running smoothly. You sign the papers on your dream house and then your buyer backs out. Dream turned nightmare, right? This would be a good time to consider a bridge loan.
What is a Bridge Loan?
Bridge loans are temporary loans to cover the difference between the sales price of a new home and a home buyer’s new mortgage if the old home hasn’t sold. The bridge loan is secured to the buyer’s existing home. The loan is then used as a down payment on the new home.
Many banks that offer bridge loans do not go by a FICO rate but more a sensible underwriting approach that hinges on the prequalification of the second home’s loan rate. (In other words, did you qualify for more than the amount of your new home or are you just barely making it. What is your debt to income ratio?)
Pros and Cons:
The Pros
• You can immediately put your house on the market.
• Bridge loans often have a grace period, without payments, for a few months.
• If the buyer has made a contingency offer to buy and the seller issues a Notice to Perform, forcing the buyers hand, the buyer can move forward still move forward with the purchase without the contingency.
• It allows you to get your new home without the stress of waiting on the sale of your old one.
The Cons
• Bridge loans cost more than home equity loans.
• Buyers will be qualified by the lender to own two homes and many buyers cannot qualify for this.
• You will essentially have two mortgage payments PLUS interest. Not the best situation for the long term.
Bridge loans are not meant to be long term, so in some cases taking out a home equity loan on your existing house for the down payment on your new home may be a better course of action. If your house sells within a month or two, you may need to make only one small payment before it closes. At closing you’ll pay off the home equity loan and be done with it. Essentially, you will have crossed the bridge before you even got to it.
