A short term bridge loan is commonly used to “bridge” the gap between escrow closings from one property to another. This can allow you extra time to sell your own home and still buy the home of your dreams now.
A Real Estate Residential Mortgage Bridge Loan
Buying a first home is a bit less complex than trading up or down to another home. Two transactions need to happen to complete the deal: first, you need to sell your current home, and then you have to successfully purchase the new one. Ideally the two transactions should be coordinated. After all, you don’t want to move twice, right? One of the ways to do this is with a swing loan, also known as a bridge loan or interim financing.
A bridge loan enables you to take out a portion of your current home’s equity. This money is used towards the down payment for the new home, and when you close the final transaction, you will need to obtain a new home loan.
How does a short term bridge loan work?
Let’s say that your new home has a price of $400,000. You have $40,000 in savings to use as a down payment, but you want to put down 20% down so you’re $40,000 short. Your current home has a market value of $200,000 and your mortgage on that property has a balance of $100,000.
These short-term loans may carry a higher risk depending on the current market.
Bridge loan programs will vary from lender to lender. Some allow borrowing of up to 80% of available equity, or around $80,000 (80% of $100,000) in our example. Other programs support lending up to 80% of the property’s market value, less mortgage balances against it–$60,000 in our example (80% of $200,000 is $160,000, less $100,000 totals $60,000). As you can see, in either scenario, the bridge loan can generate more than enough funding to be able to close the new home. You can use this swing time to shop for your permanent home loan.
However, in a stagnant market, it may take longer than six months to sell your home.
Swing loans are typically short-term loans that become due in six months or when you sell your home, whichever happens first. If the market is fast-paced, it’s safe to assume that you will sell your home within that time if the price is right. You may have to carry the costs of both homes temporarily but in this case, that won’t last for long.
Interest rates on bridge loans are usually about 2% higher than a fixed rate 30 year mortgage. Payments on residential mortgage bridge loan usually accrue (build up) and are due in full at maturity. This is done so you have lower costs for the time that you own two homes.
What am I required to do?
A few bridge swing loan programs require that your old home be under a contract to sell before any funds are issued. Other lenders require that the new mortgage be held with them before this temporary loan is funded.
In order to qualify for a bridge loan, you have to have enough income to make the payments on both mortgages. If you are renting or leasing your old home, the rental income generated can help you to qualify. If you cannot qualify for a swing loan, you will have to sell your home first so you have the equity freed up to use on the new home purchase. Some sellers will accept offers that hinge on the completed sale of your current home.
In any case, a bridge loan is a gamble that is sometimes necessary. It is important to be sure you can sell your current home within the maturity term of the bridge loan. Otherwise, you could end up selling your new home as a result and lose money as well.