A bridge loan is a short-term loan used until a person secures permanent financing or moves an existing obligation. (i.e. trying to buy AND sell a home at the same time!)
Essentially, this type of loan allows you to use the equity in your current home for the down payment of a new home. It is a great option for home sellers who have found their dream home but are still waiting for their home to sell.
The main reason home buyers tend to turn to bridge loans is that it allows them to put in a non-contingent offer on a home (i.e. the buyer can buy the seller’s home without the buyer’s home selling.) This means less risk for the seller and in most cases, makes this type of offer more appealing to sellers.
There are two main ways lenders tend to package this type of loan(s)
- Hold two loans. In this situation, you borrow the difference between the current loan balance and up to 80% of your current home’s value. The funds from this second loan are applied to the down payment for the new home you are wanting to purchase. This keeps your current home loan intact until you are ready to pay off the remaining balance with the sale of your current home.
- Roll the mortgages of two homes together. This allows the buyer to take out a single large loan to pay off the balance of their current mortgage AND cover the cost of the down payment on their new home.
In most cases, lenders only offer real estate bridge loans worth up to 80% of the combined value of the two properties, meaning the borrower must have significant home equity in the original property or ample cash savings on hand.
What are the Average Fees Associated with a Bridge Loan?
These types of loans can come in handy but at a price. You can expect a higher interest rate than you would with a conventional loan (keep in mind, bridge loans are temporary and can only be held for up to one year maximum.)
On a $250,000 loan that has a 3% interest rate, you might be paying $1,054 for a conventional loan, an amount that would rise to $1,342 with a bridge loan that had a 5% interest rate. So if it took 3 months for your home to sell, you would be looking at an additional $864 total in interest.
Who Qualifies for a Bridge Loan?
There are key things lenders will look for and evaluate to determine whether or not you qualify for a bridge loan.
- Low debt-to-income ratio
- Credit history
- FICO credit score
- The amount of equity you currently have in your home
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