Pros and cons of bridge loans

Homeowners who have to buy a new home before they are able to sell their current one often need a quick source of funds to complete the purchase.

Situations such as this call for what’s known as a bridge loan: A short-term loan that “bridges the gap” between a home sale and purchase.

What's in this article?

Bridge loans explained
When you might need a bridge loan
Pros and cons of bridge loans
How difficult is it to get a bridge loan?
How do I apply for a bridge loan?

If you think a bridge loan financing might be helpful in your situation, read on to learn how this type of loan works, what’s required, and the pros and cons to help you decide whether it’s right for you.

Bridge loans explained

A bridge loan is dependent on the equity from your current home, so borrowers need to have some equity in their current property.

Your equity is the difference between the value of your home and what you owe on your current mortgage.

Many lenders provide the borrower with the difference between their current loan balance and up to 80% of the current home’s value.

With this new loan, borrowers can cover the down payment and closing fees on their new home.

What are the terms of a bridge loan?

Borrowers usually are required to pay back their bridge loan within six to 12 months.

These are designed to be a short-term loan because they are used during periods of transition, and most borrowers are able to easily pay back the loan once they successfully sell their current home.

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When you might need a bridge loan

Bridge loans are helpful in a wide range of borrower circumstances.

For example, most borrowers will use one so they can put a contingency-free offer on a home. This makes the offer more appealing to a seller, especially in a competitive seller’s market, because it isn’t dependent on the sale of your current home.

Bridge loans can also be helpful if you have to move quickly to a new area or relocate for a job, and don’t have time to sell your home first.

While it’s ideal to sell your home before purchasing a new one, in many cases things don’t work out as smoothly as one could hope.

Sometimes, your appointment to close on the purchase of your new home is scheduled before the closing on the sale of your current home.

This is how a bridge loan bridge financing gaps: You will have the funds for the purchase as soon as you complete the sale of your home — you just don’t have it yet.

Pros and cons of bridge loans

Bridge loans can be extremely helpful in the right circumstance, and can ensure you get the home you need when you need it.

However, they have drawbacks, just like any other loan. It all depends on whether your individual circumstance matches up with what a bridge loan can offer.

Let’s take a look at the pros and cons of bridge loans to help you decide whether it’s right for you.

Bridge loan pros

  • You can make a 20 percent down payment on a home, which removes the requirement to pay private mortgage insurance (PM)
  • You can use it to cover your closing costs and fees
  • You can make a contingency-free offer on a home, which is more appealing to a seller
  • You will be able to stay in your current home until you move into your new one, rather than finding a place to live while you wait to sell your home
  • The lending process is usually quicker than for traditional loans

Bridge loan cons

  • Bridge loans are short-term, so if you are unable to sell your home within six to 12 months you will be paying for two mortgages
  • Interest rates for bridge loans are higher since the terms are shorter
  • You have to meet lender requirements to qualify for this loan, including credit score, debt-to-income (DTI) ratio, and equity
  • You will have to pay closing costs and fees for the bridge loan

Most borrowers in need of a bridge loan find the pros are enough to outweigh the cons, because having the funds they need quickly to move forward is worth any extra costs.

If you think you would benefit from a bridge loan but aren’t sure if the pros outweigh the cons, speak to a trusted mortgage lender who is experienced in bridge loans.

Your lender can take a look at your situation and help you quickly determine whether a bridge loan would work for you.

How difficult is it to get a bridge loan?

While getting a bridge loan isn’t difficult, as with any loan you do have to meet certain lender requirements.

This means having a good credit score, low DTI ratio, and sufficient equity in the home.

The requirements will vary by lender, so be sure to ask your lender how to qualify and what documentation they need ahead of time.

You want to be as prepared as possible for the application process to help things move along even more quickly.

How do I apply for a bridge loan?

Weighing the pros and cons of a bridge loan can be confusing, but the Compass Mortgage team is here to help.

We treat our customers like family, so you can expect a comfortable environment where all your questions are answered.

We care about your unique situation, and will be your partner and advocate through every step.

If you’re ready to get started with your bridge loan, apply today with the lending professionals at Compass Mortgage. We can’t wait to work with you!