You’ve found the perfect home for your growing family, but there’s just one problem. You have to sell your current house first. Well, maybe not.
Bridge loans are a popular solution for homeowners who want to buy a new house before selling their current property. A borrower can use a portion of their bridge loan to pay off their current mortgage while using the rest as a down payment on a new home.
A bridge loan may be a good fit if you:
- Have chosen a new home and are in a seller’s market in which houses sell quickly
- Want to purchase a property but the seller won’t accept an offer contingent on the sale of your current home
- Can’t afford a down payment on the new property without first selling your current home
- Want to close on a new home before selling your current home
- Aren’t scheduled to close on the sale of your current home before closing on the new house
A bridge loan is a form of short-term financing that offers an interest-only payment with just a 12-month
term. It requires a borrower to pledge their current home or other assets as collateral to secure the debt – plus, the borrower must have at least 20% equity in that home. Bridge loans typically have interest rates that are higher than traditional, long-term financing options. In addition to paying interest on the bridge loan, borrowers must pay closing costs and additional legal and administrative fees that typically range from 1.5% to 3% of the total loan amount.
However, the application and underwriting process for bridge loans is generally faster than for traditional loans. Plus, if you can qualify for a mortgage to purchase a new home, you can probably qualify for a bridge loan – assuming you have the required equity in your first home. This makes bridge loans a popular option for homeowners who want quick access to funds to purchase a new house before they have sold their current property.
Bridge loans can be a great tool when you need funds but don’t yet have access to a long-term financing solution.
Alicia Beecher is consumer lending manager at F&M Trust.
