The current housing market has created an interesting situation for buyers. It used to be commonplace to include a “condition of sale” in your offer, meaning that you need to sell your home to be able to buy the new house. However, in the ultra-competitive market offers with conditions may be immediately excluded. How can you compete if you need the equity from your current home to purchase the new one? Bridge financing.
A bridge loan is a temporary loan designed to bridge the gap for homeowners – the time between the sale of your current home and the purchase of your new home. It allows you to use the equity you’ve built up in your current house for the down payment of your new home while still waiting for your current house to sell.
Bridge financing is commonly used in hot real estate markets when buyers need to move swiftly to successfully purchase the home of their dreams. During a bidding war, offers without conditions will appeal to the seller. They don’t want to risk the deal falling through because you can’t sell your home. To be able to make a clean offer, bridge financing may be the best option for you. This will give you peace of mind and allow you some flexibility while buying and selling.
Due to the nature of the loan a bridge is a short term financing option, typically less than one year in duration.
This type of loan has a higher risk so lenders will require an excellent credit rating and low debt-to-income ratio. Equity in your home is also a key component to obtaining a bridge loan. Typically, lenders will offer 80% of the combined total of both properties, so you need to have significant equity in your home to qualify.
The best plan is to do your research first and confirm you are eligible for a bridge loan and then you can enter the housing market with realistic expectations.
The essence of a bridge loan is access to temporary financing quickly. For this reason they have an expedited process for application, approval and funding – much faster than a traditional loan.
But, convenience comes at a cost. Bridge financing has relatively short terms and higher interest rates and fees than traditional loans.
Borrowers looking to access bridge financing are willing to accept these terms because they don’t want to miss out on the ideal real estate opportunity. They know they will be able to pay it off quickly with a long-term, low-interest mortgage once their home sells. Due to their nature, most bridge loans allow the borrower to pay back without penalty
As you consider your options when buying and selling your home, bridge financing can help by:
It’s also worth noting that bridge loan repayment can often be delayed to give you time to sell your home. That means you won’t have double payments to make. If it takes a while for your home to sell, you can request interest-only payments in the meantime. That means you’ll only pay the interest until your home sells. Once the sale is finalized, you can make a lump sum payment to completely repay the debt.
Before pursuing a bridge loan, you should consider if this is the right option for you. If your home doesn’t sell as quickly as you anticipate, it can get very expensive very quickly to pay two mortgages and interest on a bridge loan. However, this type of financing can be ideal in some situations.
If you’re curious about bridge loans and if this might be the best option for you, contact us to discuss. We can review your current mortgage and finances as well as what expectations you have for your future home. Together we can find an option that will work.