Typically when you buy a new home the rule of the thumb is that you sell your current home and use the proceeds to pay for the down payment of your new home. Unfortunately, it does not work out that way for many people. They may need to purchase another home quickly for many reasons like an impromptu job offer or a new addition to the family
The speed of the housing market can pose a challenge for many homeowners and they have to make quick decisions when it comes to buying their dream home. This may include purchasing their new home with a different closing date then their current home.
This is when a mortgage bridge loan is a right solution that can help you bridge the gap between selling your old home and buying a new one. Let us look at how bridge loans work, who can qualify for one and how to use it effectively.
Bridge Loans – Basics
A bridge loan also sometimes called a “swing loan” is a temporary loan that is designed to allow buyers to finance another home before they sell their existing residence. The other use of a bridge loan that has gained in popularity is that it helps homebuyers to take possession of their new home to do a big clean up or complete any necessary renovations before the closing date.
They are generally two types of bridge loans:
- You borrow money to pay off your current mortgage plus put any excess towards your new down payment.
- Keep your old mortgage and borrow against the equity that you have built up in your current home to pay for the down payment of your new home.
20% equity in your old house is required and the term generally runs from 6 months to one year.
Bridge loans offer you payment flexibility: It might not require monthly payments for the few months you wait to sell your existing home or after you obtain the long- term finance for your new home.
Have high-interest rates: Interest rates vary from lender to lender but typically they are around Prime+2.00-4.00%. Besides, you can expect to pay for lender administration fees which run somewhere from $250- $500, as well as title fee and the appraisal fee. Also, legal fees may range from $200-$500 more than the regular legal fees for a purchase transaction.
The maximum amount that you can borrow is usually 80% of the value of an existing home for sale.
How Do You Qualify For a Bridge Loan?
To qualify for a bridge loan you must have a strong credit history and if you have some credit issues then you may need to seek private lending options. Secondly, to be approved for a bridge loan, a firm sale of your current home is also a must. Lastly, your lawyer must provide an undertaking to register the mortgage if things go wrong with the closing of your old home.
Who Should Get a Bridge Loan?
- Those who are determined to purchase their dream home and know that they will lose the opportunity if they wait to sell their current home.
- People who cannot afford a down payment without the proceeds from their old home.
- Time-sensitive relocation: People who relocate for work or business or those who want to get the move completed before the new school year.
- Those who want to downsize to a smaller property or assisted living and expect to gain enough from the proceeds of their old home to cover the cost of their new one. (and do not often qualify).
- Those that could make the new purchase contingent on the sale of their house, but sellers in their area do not accept that.
Tips For Using a Bridge Loan Effectively
Like any other home loan, a bridge loan is also debt and it comes with risks. One of the risks is that the home you are trying to sell is not getting offers and you are forced to make two mortgage payments for a long period.
The following tips will help you make the most of this financial option. Before you sign up for a bridge loan, make sure:
- To check how fast homes similar to your old one are selling as added fees could accrue in cases when a bridge loan exceeds six months. Bridge loans work best in fast-moving markets.
- You can handle two payments for up to a year. Though you hope to sell faster, you must be prepared to wait if your selling process takes longer than expected.
- To consider if you have other options such as home equity line of credit, 401(k) loan, personal loan or home equity conversion mortgage as bridge loan mortgage is right for some sellers, but not for everyone.
Knowing these things will help you decide if a bridge loan is right for you.
Another key to using a bridge loan effectively is to make sure that you have partnered with the right lender. Few banks offer bridge mortgage loans as they tend to be niche products. So shopping around to find a lender is good advice as there is a great deal of flexibility in what different lenders offer. Not all lenders require a particular debt-to-income ratio or a minimum FICO score. However, make sure to ask about terms and fees.
Contact our mortgage specialists at (877) 877 7575 to see if a bridge loan is right for you or if other options meet your financial needs better.