By Bob Walsmith Jr.
Santa Barbara Association of Realtors
Thinking about selling your home while planning your next move? Doing both of these steps at once can be a delicate balance and may cause financial strain— especially if you, like many homebuyers, are planning on using the profit from selling your current home to buy your new one. Thankfully, a bridge loan can help ease your home buying journey.
What is a bridge loan?
A bridge loan is a short-term loan used to bridge the gap between buying a home and selling your previous one. Sometimes you want to buy before you sell, meaning you don’t have the profit from the sale to apply to your new home’s down payment. This can be a challenge if you were depending on that money to buy your new home. In the meantime, you can apply for a bridge loan to help finance a home purchase.
How does a bridge loan work?
A bridge loan will help provide funds for your new home purchase if you do not have it readily available. The most common way to use a bridge loan is for closing costs. You can apply for a bridge loan with a lender. Although terms may vary, it’s standard to borrow a maximum 80 percent of both your home’s value and the value of the home you wish to buy.
How to get a bridge loan to buy a house
To qualify for a bridge loan your lender will look at standard credentials like your-debt-to-income ratio, how much home equity you have, your credit card score and possibly your household income. It helps if you’ve been a good mortgage candidate with your first home. If you do not have a decent amount of equity in your current home, it may be hard to qualify. If your lender determines that you are an ideal candidate, you may experience a faster approval process for a bridge loan than you did for a traditional mortgage.
How to repay a bridge loan
The loan typically lasts about a year until you begin making repayments. It’s beneficial to structure it so you can use the money from the sale of your home to repay your bridge loan. There’s usually a final due date for when the loan needs to be paid back in its entirety. It’s important to work out the terms of repayment with your lender and make sure you’re clear on the steps going forward.
Pros of bridge loans
• Beneficial in a seller’s market. If the market is hot and you’re competing with many other buyers, your application could be seen as more competitive with a bridge loan. A bridge loan can take away any financial contingencies in your offer. This is desirable to a seller because it’s a better guarantee on whether the deal will go through.
• You can avoid private mortgage insurance (PMI) by putting down 20 percent or more of your down payment. If you do not put down 20 percent, PMI is required and raises your mortgage payments.
• Quick financing. It can be faster to qualify for a bridge loan so you don’t have to worry about selling your current home before buying your next nest.
Cons of bridge loans
• Higher interest rates. Since bridge loans are short-term solutions, the lender needs to charge higher rates. The higher rates make lending the money worthwhile for the lender.
• Ultimately a bridge loan is more money out of your pocket as a homeowner. The bridge loan is a financial resource that may be worthwhile or necessary in the moment, but remember the interest and various fees you pay is money out of pocket that you won’t be getting back.
• Two mortgage fees. Once the bridge loan closes, you’ll start paying it back in addition to your actual mortgage.
• Can be hard to qualify for if your finances don’t meet lender requirements.
Applying for a bridge loan may be beneficial depending on your financial situation and where you are in the buying and selling process. Make sure to weigh your options, consider alternatives and talk with your local trusted Realtor® for referral options.
Bob Walsmith Jr. is a native to Southern California and a Realtor® with Berkshire Hathaway HomeServices California Properties in Santa Barbara. During his work with the Santa Barbara Association of Realtors, Bob has served on the CORE Committee, Education Committee, been Chair of the Budget & Finance Committee, and the Multiple Listing Service Committee. He also is on the Board of Directors of the Alpha Resource Center of Santa Barbara. Bob lives in Goleta with his beautiful wife Julie. When not working, Bob enjoys playing golf, fine wine, fine dining, and walking our beautiful coastline. Bob can be reached at 805.720.5362 and/or email@example.com