The gap between a new home purchase and selling your old one can be tricky.
Many homeowners lack the funds to put a down payment on a new home until they are able to sell their existing home, or they need a place to live before they can sell their home.
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If you’re in one of these challenging scenarios, you may be able to use a bridge loan to help. A bridge loan is a short term loan that “bridges the gap” between the sale of a home and purchase of another.
Let’s take a look at the benefits of a bridge loan, how they work, and whether you should get one.
When to consider a bridge loan
Bridge loans, sometimes referred to as gap financing, are most often used as a short-term source of funds to pay a down payment and closing costs prior to the sale of a current home.
But there are several scenarios where a homeowner may need to consider the extra funds a bridge loan can provide.
The following are some of the most common situations to use a bridge loan:
- You have found the perfect home, but homes are selling quickly in the area and you haven’t sold your home yet
- You need to move quickly for a new job or job transfer and haven’t sold your home yet
- The seller won’t accept an offer that’s contingent on the sale of your current home
- You can’t afford a down payment on your new home before selling your current one
- You are scheduled to close on your new house before you close on the sale of your current home
In ideal circumstances, a homeowner would be able to sell their existing home and use the funds to buy their new home.
Unfortunately, things don’t often happen as smoothly as we would like. In those instances, a bridge loan can help homeowners keep a purchase moving while they wait for their current home to sell.
They can then pay back the bridge loan and their original mortgage with the funds from their previous home’s sale.
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Benefits and disadvantages of a bridge loan
While a bridge loan can be a great solution for borrowers in a pinch, it doesn’t come without its disadvantages.
However, bridge loan borrowers often find the cons to be worth it overall, since a bridge loan might be their only solution to moving forward with their goals.
Benefits of a bridge loan
The biggest benefits of a bridge loan include:
- Provides short term financing for a new home before your existing home sells
- Ability to place a contingency-free offer on a home, which is more appealing to a seller and can put you ahead in a seller’s market
- Ability to make a 20 percent down payment on a home, which can save borrowers from paying private mortgage insurance (PMI)
- Allows families to move quickly once, rather than having to find an apartment or other place to stay while they wait to sell their home and get into their new one
- Lending process is generally faster than a traditional mortgage loan so you can secure funding quickly
Cons of bridge loans
On the other hand, here are the biggest drawbacks to this type of loan:
- You’ll have to qualify for this type of loan, which means meeting a lender’s requirements for home equity amount, credit score, and debt-to-income (DTI) ratio
- Loan terms are generally only six months to a year, so if you can’t fulfill the payments or get your existing home sold in time it can become stressful
- Interest rates are higher since loan terms are shorter
What are the costs involved in getting a bridge loan?
In addition to the higher interest rates for a bridge loan, a borrower also will have to pay closing costs and fees.
The fees and terms of a bridge loan will also vary by lender. Some lenders will use the bridge loan to pay off your current home’s mortgage and replace it with a new mortgage. While others will just add the bridge loan to your current mortgage, giving you two mortgage payments for short time.
Fees may include an origination fee, appraisal fees, escrow, title policy, and any other fees outlined by your lender. Borrowers may end up paying around 1.5 percent to 3 percent of the loan amount in these costs and fees.
Because you’ll be paying closing costs when you close on your new home as well, it’s important to be prepared for these additional costs.
Borrowers often feel the convenience of a bridge loan makes these additional costs worth it, but it’s important to know what to expect.
How long does it take to get a bridge loan approved?
Bridge loans typically have a faster application process, approval, and funding than traditional loans, but timing varies by lender.
To ensure the process goes as quickly and smoothly as possible, make sure you discuss with the lender what documents and information they need ahead of time so you can be prepared to provide it.
Additionally, should the lender need extra documentation later, be sure to get it to them as quickly as possible to ensure they have everything they need to get you approved.
Should you get a bridge loan?
If you need to make some time-sensitive decisions regarding the purchase of a home before your current home sells, a bridge loan may be able to help ease the stress of this uncomfortable gap.
Be sure to weigh the pros and cons of a bridge loan carefully, so you understand what’s involved and what’s expected of you.
Discuss your options with a trusted lender who is experienced in bridge loans, and ask questions about the requirements, documentation, terms, and fees.
The decision to get a bridge loan is personal, and depends on each borrower’s unique goals and financial situation.
How to apply for a bridge loan
If you have looked at the pros and cons and feel a bridge loan is best for you, apply today with the lending professionals at Compass Mortgage.
Our motto is “Home to a Better Mortgage Experience,” because we believe we are set apart by our core values to go above and beyond for our customers, and treat all with love and respect.
If you’re searching for a mortgage experience with a personal touch, call us today to speak with a loan officer. We will be your advocate and partner throughout every step!