Bridge Loans: 4 Key Factors You Need to Know

Buying a house can be a delicate balance of timing and finances, especially if you are selling one property and buying another.

One solution for potential home buyers is a bridge loan, which operates like an unsecured line of credit. Home buyers can use this type of loan to buy their new house before the old one sells, and then they can pay it off with the profits from the sale.

Here's what you need to know about bridge loans.

Who is Qualified

Homeowners with a good amount of equity in their homes could qualify for a bridge loan. Not all applicants, however, including some homeowners, will qualify. Homeowners who have not built up enough home equity may be turned down.

How Much Will I Need?

To calculate the amount of money you'll need to bridge the gap between selling one property and buying another: first, add up the amount you expect to pay for your new home along with closing costs and other fees. Subtract the net amount you expect to sell your home for. The difference between the two is the amount you'll need for a bridge loan.

What are the Terms?

It's important to remember that this kind of loan is a short-term solution, not a long-term financing option for a home. The loans do come with stipulations that borrowers must meet to be approved, and interest rates likely will be higher than those on standard home loans.

First, borrowers will be required to meet certain income and credit standards to qualify for a bridge loan, as lenders want to ensure that the lender is in a financial position to pay the loan back. Once those qualifications are met, lenders will look at the situation with the property you are selling. Generally, a potential buyer already should have made a decent offer on your home, which will help the lenders determine when you'll be able to pay back the bridge loan.

Lenders also will look at how much equity you have in your home. Lenders will have different requirements for the amount, but the bridge loan will be borrowed against your home equity, which will determine the maximum amount of your bridge loan.

What are the Potential Drawbacks?

​Bridge loans can come with their own fees and closing costs, which add up and can make the loan more costly than its worth. These additional costs, which can include appraisal fees, administrative fees, and loan origination fees, can be thousands of dollars.

In addition, once you close on your new house you'll have to pay off the bridge loan and apply for a traditional mortgage. That means another round of closing costs and fees.

Another financial pitfall awaits if your current home doesn't sell when you anticipated. If you take out a bridge loan to buy a new house and the old house sits on the market for months, you'll be making monthly payments toward two mortgages and the bridge loan until the house sells.

Buying and selling homes involve many emotional decisions, and buyers should be aware that emotions can override common sense when it comes to financing a new home. No matter how much you like a property, it's prudent to weigh the financial costs of a bridge loan carefully before deciding to apply for one.

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