What Is a Bridge Loan? The Basics of Residential Bridge Loan Lenders

If you’re selling a home and looking to buy another one, your realtor may have spoken to you about a bridge loan. Residential bridge loan lenders will offer a loan to a buyer who needs to buy another home before their current home sells.

If you’re selling a home but are hoping to close on a new one before it sells, a bridge loan might be a great option for you.

From how they work to what they are, read on for everything you need to know about the benefits and potential drawbacks of using a bridge loan for your next home purchase.

What Is a Bridge Loan?

A bridge loan is a temporary loan you can take out that is secured by your existing home. This will bridge the gap between what your new mortgage will be and the sales price of your new home if your existing house isn’t sold before the closing.

Essentially, a bridge loan is what you’re borrowing for the down payment on your new house.

Let’s say you’re selling your current home for $300,000 and you’ll be making a profit of $30,000 on the sale. The closing is set for December 1st and you’re closing on your new home on November 1st. To get your new home, you need to take that $30,000 and use it as the down payment.

You can take out a bridge loan for $30,000 to use as the down payment for your new house. This allows you to close on your current home before your existing home closes a month later.

How Does a Bridge Loan Work?

The funding for a bridge loan is different for every lender. Most lenders will look at a bridge loan a little more casually since it isn’t a long-term loan.

If it makes sense for your particular situation, a lender will use basic qualifications, the details regarding your new home, and your current home as the basis for their decision.

In the example above where you’re borrowing $30,000 to pay for your down payment, a lender will qualify you for that amount and then disperse the funds to you before your closing.

You and your lender will agree on a time for the loan to be due as well.

You may just want to borrow the money for a short timeframe — anywhere from six weeks to several months. This will allow you to close on both of your homes and give a buffer in case any problems arise at the closing.

If you take out a bridge loan for a longer term, such as 15 years or 30 years, you’ll essentially have two mortgages you’ll be making payments on.

The Pros of a Home Bridge Loan

There are many benefits to using a bridge loan. The biggest benefit is that a bridge loan allows you to buy your new home before your old one sells. You’ll be able to immediately use the equity in your current home.

Your bridge loan also may not require any monthly payments for the first couple of months. This break can float you through until your home is sold.

Another perk is that if you had a contingent offer on the home you’d like to purchase, you can remove the contingency. Your offer will be a lot more appealing to the sellers without any conditions in place regarding your existing home.

A bridge loan will also relieve some pressure off of you financially. If you’re waiting for your home to sell, you can buy yourself a little more time. Maybe you can also hold out for a higher-priced offer.

The Negatives of Using a Bridge Loan

As with any loans, there are always some drawbacks to think about.

With a bridge loan, you may be paying a higher interest rate than with a home equity loan. This can be anywhere from 0.5 to 1.0% higher than with a standard 30-year fixed mortgage.

If you don’t have credit that’s in good standing, you also may not qualify for a bridge loan or you may have a higher interest rate. You can always download a free copy of your credit report courtesy of the Federal Trade Commission.

You should always know where you’re at financially and the market in which you’re selling your home. If you’re having trouble financially or your home is in a tough seller’s market, you may want to consider other options.

Having two mortgages can also be pretty stressful for some people. You’ll have two mortgages accruing interest and two payments to be responsible for.

Applying for a Bridge Loan

When you’re applying for a bridge loan, there are a few noticeable differences than when you’re applying for a standard 15-year or 30-year fixed mortgage.

Because the underwriting is a little more flexible, your lender will have more relaxed requirements when it comes to your minimum FICO score.

They may also have looser debt-to-income guidelines because this isn’t a long-term loan where you’re financing the bulk of your home.

Residential bridge loan lenders will typically be a traditional bank or online lender.

Although the lending requirements may be looser, you’ll need to prove you can handle your current mortgage in addition to the bridge loan at least temporarily.

Costs and Fees

With any loans, there are standard costs and fees that you should keep in mind.

With your bridge loan, you can expect fees for administration, escrow, appraisal, your title policy, wiring, and the notary.

Details from Experienced Residential Bridge Loan Lenders

If you’re selling a home but are hoping to close on a new one before it sells, a bridge loan might be a great option for you.

You’ll be able to make an offer without a contingency, have funds for a down payment, and will give yourself some breathing room while you work through both of your closings.

Residential bridge loan lenders are also able to remove some constrictions on your loan as opposed to a home equity loan or a traditional 15-year or 30-year mortgage.

If you’re ready to learn more about bridge loans and your other lending options, get started here.

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