Moving can be complicated enough. In some circumstances, you may need to buy your new home before you have sold your old one. In these cases, you need a bridge loan.
What is a Bridge Loan?
A bridge loan is a loan secured on your current home (or other appropriate assets) which you then use to pay the down payment on your new home. This is a form of short-term financing (bridge loans typically come due after 6 months to a year) which might also be called bridge financing, interim financing, gap financing, or a swing loan.
Interest rates are typically between 8.5% and 10.5%, so these loans can be more expensive. However, they are typically a lot easier and faster to get approved.
You need to have at least 20% equity in your current home to qualify for a bridge loan.
Is A Bridge Loan Right For Me?
Bridge loans can very useful for homebuyers in certain circumstances. Typically, bridge loans work well for borrowers who:
- Are relocating and have to move by a certain date. A bridge loan can help them avoid paying a few months of rent (which can be even more expensive), moving twice, and worrying about storage.
- Are in a seller’s market and know if they don’t get the down payment in soon, the house will disappear.
- Have a delayed closing, such that the sale of their current home will close after the new home.
In some cases, you may need a bridge loan because the seller won’t accept a contingent offer.
How Does a Bridge Loan Work?
As already mentioned, bridge loans can be a worthwhile financing option that allows you to buy a home, often cheaper than having to rent for a short period of time. The bridge loan will also come with its own set of closing costs and fees, which are typically 1.5% to 3% of the total loan amount.
The high interest rate can be mitigated by the decent chance of being able to pay the loan off quickly. If you are not confident you can sell your current home quickly, however, you may want to avoid a bridge loan. Some lenders also require the interest to be paid in a lump sum, possibly at closing.
The loan is typically repaid when the sale happens, although it’s possible to get bridge loans that you pay off like a regular mortgage. If you don’t sell by the end of the term, you will start having to pay back the bridge loan as well as your regular mortgage.
Benefits of a Bridge Loan
Bridge loans do come with benefits. They can generally be obtained quickly and with less paperwork than a regular mortgage. Here are some other benefits:
- The qualification process is typically very similar to that for a mortgage. In other words, if you qualify for a mortgage, you probably qualify for a bridge loan and you can use a lot of the same paperwork.
- Because you no longer have to worry about selling your old home before you can really look for a new one, a bridge loan can reduce the stress of moving and help give you some peace of mind.
- Bridge loans almost never have repayment penalties. The lender knows that you intend to pay the loan off as soon as you have sold your old home and plans accordingly.
If you are interested in purchasing a new home before selling your current home, a bridge loan may be a good fit for your goals. To get started, check out our Bridge Forward online resources then reach out to us so that we can guide you through your next life transition.
