What are bridge loans and are they right for you?
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Bridging loans can help you finance the down payment for a new home when you haven’t sold your current home yet and you don’t have enough cash.
With a bridging loan, you won’t have to submit an offer to purchase to sell your home. You will also avoid having to sell, move, buy, and then move again. However, these amenities come at a cost.
Here’s what you need to know about bridging loans:
What is a bridging loan?
A bridging loan, sometimes called a bridging loan or bridge financing, helps you get short-term financing to buy a new home while you wait for your current home to sell.
Bridge loans give you more flexibility when buying a new home. If you qualify for the loan, you won’t have to sell your current home until you can buy your next home.
After getting a bridging loan, you’ll make interest payments only for a short time – usually six to 12 months, although this depends on your lender – and then pay off all the principal when you sell your home or at the end of it. the term of your loan.
How to use a bridging loan
There are two common ways to structure a bridging loan:
To pay off your current mortgage
Let’s say your current home is worth $ 400,000 and your mortgage balance is $ 80,000. Like a home equity loan, you will need to keep 20% of the equity in the home when you get a bridging loan.
In this example, you can borrow up to $ 320,000, which you can use to pay off your $ 80,000 mortgage. This will leave you with $ 240,000 to invest in the down payment on your next home, minus a few thousand for the closing costs of your bridging loan.
As a second mortgage
Again, let’s say your current home is worth $ 400,000, your mortgage balance is $ 80,000, and you secure a bridge loan for 80% of your home’s value ($ 320,000).
You continue to pay off your $ 80,000 mortgage, but now you have $ 320,000 to invest in your next home, less closing costs.
If you’re downsizing, the bridging loan might be enough to cover the cost of your new home.
Eligibility for a bridging loan
Compared to qualifying for a first mortgage on a primary residence, it can be difficult to qualify for a bridging loan.
Unless your current home is already in receivership, you will need to show the lender that you can pay the mortgage on your existing home, the mortgage on your new home, and the bridging loan.
This means that you will need a lot of income to handle all that debt, as well as a good credit rating.
Unlike a conventional loan or a government guaranteed mortgage, however, there are no detailed guidelines that lenders must follow in determining who qualifies for a bridging loan and who is not. It’s up to the lender to decide.
Find: How Your Debt-To-Income Ratio Can Affect Your Mortgage
Advantages and disadvantages of bridging loans
Bridge loans give homeowners more options when they are ready to move. But they are not as easy to find as other home loans.
- They allow you to make an offer without any sales contingency. In a seller’s market, you might be competing with other buyers for the same home. If you can come up with a faster closing – one that doesn’t depend on selling your home first – sellers will be more likely to accept your offer.
- They save you from having to travel twice. Packing up and moving means a major upheaval in your life. It also costs money, lost work time and moving costs to rental depots and storage costs.
- They can help you avoid PMI. The money from a bridging loan can save you 20% less on your next home. This means you won’t have to pay for private mortgage insurance.
- They give you more time to find the right home. If you want to sell your current home first to get money for your next home – but don’t want to move twice – your options will be limited to whatever is on the market in the short window before the new one. buyer does not want to move in. .
- It is not a last minute solution. Some lenders can close in a week or two. Others require a more traditional delay of 30 to 45 days. If you think you need a bridging loan, organize your financing in advance.
- Interest rates on bridging loans can be high. You might be able to get a low interest rate, similar to a conventional mortgage. But bridging loan rates can also be very high, some exceeding 9% with some lenders.
- They can be more difficult to qualify. You will need to demonstrate that you can make an additional monthly payment on top of your existing obligations and your new mortgage.
- You could risk a foreclosure. Since your home is the security for a bridging loan, you could lose your home to foreclosure if you become unable to pay it off. However, you may be able to renew your bridging loan, for an additional fee, if your home has not been sold at the end of the loan term.
Should you get a bridging loan?
Anyone who has solid finances and wants the opportunity to buy their next home before selling their current home is a candidate for a bridging loan.
If you need to move quickly or want to renovate your new home while living in your old one, you could also qualify for a bridging loan.
Although Credible does not offer bridging loans, you can use our platform to compare pre-qualified mortgage rates from our partner lenders. It’s free and only takes a few minutes.
Alternatives to bridging loans
Since bridging loans can be expensive and difficult to obtain – not to mention the most difficult to find, as it is a specialized product – you may want to consider other options for financing a down payment.
Home equity line of credit
Best if: You want to reduce interest costs
A home equity line of credit can have lower closing costs than a bridge loan, and you’ll only pay interest on the amount you need to borrow. In addition, HELOCs only require payment of principal in the early years.
You are unlikely to be approved for a property once your home goes up for sale, so this strategy requires advance planning. Some lenders specifically prohibit the use of a HELOC as a bridging loan.
Best if: You have enough money to put 10% less on your new home
A piggyback loan, or 80/10/10 loan, is a type of second mortgage that can cover 10% of the purchase price of your new home. Combined with a 10% down payment, you will only need to borrow 80% of the purchase price of your primary mortgage, allowing you to avoid PMI.
If you want, you can pay off this loan when you sell your current home. A piggyback loan usually has a higher rate than a first mortgage.
Best if: You want to minimize costs
Personal loans are unsecured, so they usually have higher interest rates than mortgages, and you may not be able to borrow as much.
Since you will have to pay both principal and interest, the monthly payment for a personal loan could also be higher than with a bridging loan or HELOC.
However, personal loans do not have all of the closing costs that mortgages or bridging loans do. Underwriting also tends to be quick and the payback period will usually be several years.
Keep reading: Home equity loan or personal loan: which one is right for you?
Best if: You want to minimize borrowing – and show off your home
There are several companies out there that will buy your home and then give you plenty of time to find a new location before you have to move.
You might pay a convenience fee or earn less than market value if you sell your home this way, and the service might not be available in your area.
Credible does not currently offer bridging loans, but we can help you compare mortgage rates from multiple lenders – you can see the prequalified rates from our partner lenders in the table below.