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Buying and Selling a Home: How to Bridge the Gap
There may be a point when you're faced with a sudden transition and have to purchase a new property even before you sell your old one. In this scenario, you might wonder if you should apply for a bridge loan to span the gap between the sale and purchase. Our real estate agents explain how bridge loans can ease the transition from one house to another.
What Are Bridge Loans?
Also known as "gap financing," bridge loans are temporary loans used in residential and commercial real estate. They provide a lifeline for buyers who are eager to buy a new home before they've sold their current one. Unless you have enough cash for the down payment, it can be hard to qualify for a loan to finance a new home while you're still saddled with mortgage payments on your current home.
With a bridge loan, you'll use the loan amount as the down payment for your new home, which makes the process go more smoothly. And like home equity loans, HELOCs, and mortgages, your current home will serve as collateral. You can then move into your new home and start focusing on selling the old one.
How Bridge Loans Work
As tools used by homeowners faced with a sudden transition, bridge loans vary widely in their costs, terms, and conditions. Some are structured in a manner that piles the new debt on top of the old home's mortgage, while others require you to pay off the old debt before the bridge loan's closing. Borrowers may also encounter different interest rates. You might be required to make monthly payments, or you might have to pay upfront or end-of-the-term lump sum payments.
Most bridge loans share some characteristics, though. They are usually good for 6 months but can extend to a year. Lenders rarely extend the bridge term loan unless the borrower agrees to take a mortgage for the new home with the same institution. Typically, you can finance up to 80% of the combined value of your old and new home. For the remaining amount, you may have to use home equity or down payments, or a combination of the two.
Once you move into your new house, you start paying a bridge loan payment on top of your monthly mortgage payment. In some cases, however, you might have a few months before you start making payments, which offers you the flexibility of paying when you have cash flow. And once your old property sells, you pay off the bridge loan and apply for a longer-term mortgage to refinance your new home.
Pros and Cons of a Bridge Loan
When you take out a bridge loan to buy a new home, you can make an offer without a financing contingency. This means that you won't have to wait to be approved for a new mortgage to make the purchase. Chances are, the current owner of the house you hope to buy doesn't like the idea of financing contingencies because it would mean that your offer is not guaranteed. A bridge loan can solve such issues by ensuring that you have the money needed to close the deal.
Still, bridge loans are not common and typically require a low debt-to-income ratio and an excellent credit score. And because you're borrowing for a short time, and lenders can't make much within that period, the interest rates tend to be higher than a standard home loan.
If you're in a tight spot and need to buy a new home without dealing with the process of trying to get cash for the down payment, a bridge loan can make the move easier. Whether you're searching for South Bend homes for sale or are ready to sell your current home, Cressy & Everett Real Estate can help. Contact us today for your homeownership needs.
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