A bridge loan is a short term loan that helps homebuyers buy a home. It does not require them to sell their existing home. Some buyers might have enough equity in their home to finance the purchase with cash.
Homebuyers can borrow a bridge loan to use equity from their existing home to pay down the down payment.
Bridge loans cannot be used to purchase a new home (downpayment and closing costs), but they can “bridging” time between the sale and purchase of the new home. The homeowners can use the proceeds of the sale to pay off the bridge loan. This will ultimately leave them with the home and only the mortgage.
A bridge loan is a smart choice
Some homebuyers may find bridge loans very beneficial, but not all. Is a bridge loan right to your client? These are some things to remember.
Bridge loans are first intended to finance the purchase of a primary residence. A bridge loan can be used to purchase a second property or investment property. However, it’s harder than you might think. Bridge loans can also be used by people who have a majority of their assets in their home and don’t want to sell other assets.
A bridge loan is best for homebuyers who are unable to sell their house or don’t want to borrow money. These are just a few of the reasons people choose to borrow bridge loans.
- It is not an easy task to sell a house. You need to move, stage, find a temporary place to stay and then connect with a buyer. It is possible to sell your home after you have purchased a new one with bridge loans.
- Most homebuyers cannot afford two large mortgages in highly competitive markets. These people are often forced into making a contingent offer which is less attractive. This is why buyers can get a bridge loan.
- Sometimes the timing doesn’t work out in certain cases. Let’s suppose a homebuyer discovers their dream home, but the current house isn’t available for sale. Maybe it needs staging, renovations, or other considerations. They don’t have the risk of missing out on this opportunity by taking out a bridge loan.
Bridge loans may not be the best option for you.
Bridge loans are not always financially sound, despite their many benefits. These are just a few examples of situations where a bridge loan may not make financial sense for your client.
- Your client is looking to quickly sell their house. You need to give us enough time to complete underwrite them before we can confidently make an offer. Bridge loans won’t work if your client is in a rush.
- Your client’s equity in their home is less than 20%. They are not eligible for a bridge loan in this instance.
- Your client wants to purchase a second home, or an investment property. These homebuyers are not eligible for DTI, so it is more difficult to qualify. Although theoretically still possible, the buyer would need to prove sufficient income to pay off both loans.
Getting a Better Idea Of How a Mortgage Bridge Loan Works
Even though bridge loans may sound a bit complicated, it is easy to break down the process into three stages.
Stage 1: Searching for a home
Let’s say that your client still has $700k on their mortgage and $300k equity (money they haven’t paid off). They decide to buy a home that is more up-to-date and begin looking at properties.
Stage 2: Down payment for bridge loan funds
They get a bridge loan against the existing home equity to pay down the down payment. The down payment is also covered by another $100k of savings.
Stage 3: Selling an existing house
Their existing home must be listed by an approved broker in order to qualify for the bridge loan. After that, they can sell their home and get a bridge loan.
The bridge loan process is for you and your client
- A Bridge Loan Expert will call your client to discuss your financial situation and other information.
- Better Mortgage will underwrite the bridge loan and any first lien, if necessary (approx. Each underwrite takes 3 business days.
- If the underwriting is successful, your client will receive a pre-approval fully underwritten for the bridge loan as well as the first lien. They are able to confidently make an offer on a home.
- Your client is your agent. Together, you will find a home. Your client will lock in a rate for their new mortgage loan once they have accepted an offer on a new property.
- Better Mortgage finishes processing third-party orders for the new property.
- After everything has been approved, the bridge loan is funded and the new first lien is created. Your client now has ownership of the new residence and the departing residence.
- Your client and you sell the original home. All existing mortgages, which includes our bridge loan, are paid off.
What is the term and structure of a bridge loan?
A bridge loan is a short-term solution that facilitates the purchase of a property. Our bridge loan is an interest-only, 12-month loan (360 for Texas).
Typically, your client will pay an interest payment each month. The principal balance is paid in a balloon payment at the end of the term, which can be 12 months or the sale of the original residence.
What are your rates for bridge loans?
Because the loan term for bridge loans is shorter than that of standard mortgage loans, they are subject to higher interest rates and fees. A bridge loan rate can range from 8% to 10%.
Bridge loans, despite the fact that some may be hesitant about this amount, are still worth it for many homeowners because they provide quick access to financing and allow them to purchase a home whenever they need.