Bridge Loans: What Buyers Should Know
April 12, 2018
If you are already a homeowner and are looking to buy a new home, you have the distinct benefit of being able to use the proceeds of the sale of your property to be used to make a new home purchase.
But what if the closing dates don’t line up? What if the closing date of your new home comes well before that of the sale of your current home? In a case like this, you wouldn’t yet have the proceeds of the sale available to help finance your new home purchase.
That’s where bridge loans may prove to be quite handy. They can help buyers manage their new mortgage while still carrying the costs of their current home before it closes.
What Are Bridge Loans?
A bridge loan is basically a short-term loan that provides buyers with the necessary funds to finance a new home purchase before selling their current house. By using the equity in your current home, a bridge loan can provide you with the means to put a down payment on your new property before your existing home sells.
For example, if the closing date for your new home is in 30 days but the possession date of your current home is 60 days, a bridge loan would cover your equity loan over that 30-day gap.
After your current home sells, the money you receive at closing will then be used to pay off the bridge loan.
You’ll Need a Lot of Equity in Your Home to Qualify
In the majority of circumstances, lenders usually only offer bridge loans that are worth 80% of the combined property values, which means you’d need quite a bit of home equity in your current home or plenty of liquid cash in savings.
Bridge Loans Typically Have Higher Rates Than Conventional Home Loans
Since bridge loans are typically short-term, lenders tend to charge higher interest rates for them. The rates are typically charged at prime +2.00 to 3.00%.
That said, higher bridge loan interest rates shouldn’t have much of an effect on the overall cost of financing compared to average mortgage rates because they’re only needed for a very brief time period. Not only that, but the remainder of your mortgage will be funded at a lower rate.
Fees Will Apply
All mortgages come with a typical set of fees that buyers will have to cover, and bridge loans are no different. The typical fees you can expect to pay to take out a bridge loan include:
- Appraisal fees
- Title policy fees
- Escrow fees
- Administration fees
- Recording fees
- Loan origination fees
Buyers Must Qualify For a Bridge Loan
Since a bridge loan is still a loan, you will still have to go through the motions of getting approved. Your financial history will be assessed and your credit score will be checked. Your income compared to your overall debt load will also be looked at to make sure you will be able to carry an additional payment on top of all your other current debt obligations.
Your Existing Equity Will Determine Your Bridge Loan Amount
Before your lender agrees to extend a bridge loan to you, the amount of equity you have built up in your home will be looked at. The amount required is typically determined by how much your home is presently worth compared to the outstanding balance still owed on your mortgage.
Bridge Loans Can’t Be Taken Out For Very Long
Generally speaking, bridge loans are only meant for a very short period of time and are not designed to be taken out for months or longer. Bridge loans are typically only offered for no longer than 90 days, though some lenders may agree to extended time frames. If you need a loan for a longer period of time, you might have to look at other financing options.
Further, bridge loans are only provided when an offer has already been accepted on your current home and all contingencies have been fulfilled or waived. Most lenders will want to verify that a firm offer has been placed on your existing home. This will give your lender an idea about when your home will close and when they can anticipate the loan to be paid back.
The Bottom Line
Not all lenders offer bridge loans, but you’ll be able to find one who does by speaking with a seasoned mortgage broker. These professionals typically have access to a network of lenders who provide these specific types of short-term loans. Rather than being overly concerned about lining up your closing dates, you can take out a bridge loan that will provide you with an effective and affordable way to essentially carry two homes at once until your current home finally closes.
