Are you currently a homeowner looking to sell your home and purchase a new one? Maybe you're wondering how to secure a down payment in the process? Getting a bridge loan may be the answer. But before you commit, you'll want to know the benefits and disadvantages so you can choose whether it's the best path for you as you transition from one home to another.
What Is a Bridge Loan?
A bridge loan is a temporary, short-term financing option created to help home and real estate buyers secure funding and allow for transition time when selling one home and buying another. Here are five aspects of a bridge loan:
- Collateral: Your current home is used for collateral.
- Short term: 6-12 month payoff time is typical.
- Interest rate: Usually about 2% higher than the market.
- Equity: 20% equity is needed in your first mortgage in order to qualify for two mortgages. This is because lenders will often approve bridge loans at the value of 80% of both the borrower's current mortgage and the proposed mortgage they are aiming to attain.
- Repayment penalties: None. Payback a bridge loan early without any prepayment penalties.
6 Types of Bridge Loans
There are six types and ways to use a bridge loan:
- Personal property: When selling your current home and buying another.
- Hospitality: When securing permitted funding and looking to stabilize cash flow.
- Retail: When closing on a retail space quickly or grabbing a space at a stellar deal before rates rise.
- Industrial: When renovating a building or upgrading a company's building space.
- Office: When transitioning or upgrading from one office space to another.
- Multifamily: When renovating units, resulting in the ability to raise tenants rents.
5 Reasons to Get a Bridge Loan
- Buying at auction: If you are buying your next home at auction, a bridge loan can provide the funds you need to beat others to the punch without having to come up with cash.
- Investors: If you are an investor or developer, a bridge loan can provide the funds for flipping a property.
- Renovations: Funds for renovating a home can come from a bridge loan when you expect a quick sale after the renovations.
- Relocating: If you're relocating from one city to another because of work or another reason, a bridge loan can help you get the down payment you need if you're short on cash.
- New construction: Buying a new construction home may require funding for its creation before securing a traditional mortgage; a bridge loan can be that in between funding needed.
Now let's take a look at some advantages of getting a bridge loan. The primary benefit of a bridge loan is short-term financing. Here are five more advantages to consider.
- No buying restrictions: Buy your new home while allowing time for the best offer to come through on your existing home. Or, search for your perfect next home without the worry of selling your current home beforehand.
- Opportunities: Having a bridge loan allows you to secure opportunities that you might otherwise miss out on in the housing market.
- Speed: Qualifying and being approved for a bridge loan is a faster process than applying for a traditional loan or an equity loan.
- Monthly payments: When payments start on a bridge loan, they may be delayed by a few months depending on the lender and terms of the bridge loan.
- Payment options: You may choose to pay off your bridge loan before or after securing long-term financing.
There are four things you should consider before getting a bridge loan:
- Costs: Bridge loans are more expensive compared to equity loans.
- Qualifications: Qualifying for a bridge loan means having the means to be approved for carrying two mortgages. Not all who seek a bridge loan will be able to be approved for the loan and buy their new home with the help of a bridge loan.
- Terms vary: Because there are no set guidelines, bridge loans will vary widely in cost, terms, and conditions.
- Mounting debt: Paying two mortgages in addition to paying off your bridge loan while waiting for your first home to sell can create financial stress.
How to Shop for a Bridge Loan
Shopping for a bridge loan and short-term financing is different than shopping for a long-term traditional mortgage. Long-term traditional financing and mortgages have set guidelines and requirements for how they are underwritten. On the other hand, a short-term bridge loan comes with no set guidelines for underwriting the loan (required FICO scores and debt to income ratios are not predetermined).
Lenders often utilize common sense when underwriting a bridge loan. So when shopping for a bridge loan, here are some steps to follow:
- Lenders: Contact many lenders and brokers. Find out each lender's requirements for qualifying for a bridge loan. Each will be different.
- Compare: Compare and contrast the requirements and qualifications of each lender.
- Select: Choose the best lender with the best terms for the bridge loan you need.
Is a Bridge Loan Right for You?
Whether a bridge loan is for you or not will depend on six elements:
- The housing market
- Your creditworthiness
- Whether you've saved for a down payment
- Qualifying for a home buying program
- Qualifying for down payment program
Bridge loans are not ideal. However, they do serve a purpose. If you can qualify for down payment or home buyer assistance programs, it's likely you won't need a bridge loan. Similarly, if you have the savings to support a cash down payment, you'll have no need for a bridge loan.
However, if you are relying on the sale of your home for a down payment, and the market you're selling your home in is slow, but you need to move into your new home before the home you're in now sells, a bridge loan will allow you to make that transition. Just know that your creditworthiness and finances , including your monthly income, must allow you to cover the payments for two mortgages.
With or without a bridge loan, LendingTree is here to support you through the home buying process with loan comparisons.