You may have heard the term thrown around before but do you really know what a bridge loan is?
What's in this article?
Bridge loans offer a way for homebuyers to “bridge” the gap between their old home and purchasing a new one.
These loans can even help business owners or entrepeneurs when they need to quickly secure funding to start earning.
No matter your situation, the way bridge loans work can be tricky to understand.
In our bridge loan guide, we’ll explain what they are, how they work, and how My Perfect Mortgage can help you.
What is a bridge loan?
A bridge loan is a short-term loan used in real estate, typically by those who are selling and buying a home simultaneously. Bridge loans are also available for businesses.
This loan offers to bridge the gap between your need for funds and when you can actually get financing. If your house is on the market, but you need funds to buy your new house now, a bridge loan can help you before your current house sells.
In the case of a business owner, they may use a bridge loan to get by day-to-day while they’re waiting for an expected amount of capital to come in or to capitalize on a deal.
For homebuyers, bridge loans can be particularly useful in competitive markets. You can jump on something you want relatively quickly, without waiting around for your current home to sell.
The application and the time it takes to receive the funds are also much shorter than a conventional loan.
This puts you ahead with sellers too since you won’t have any contingencies related to selling your home. Dropping contingencies is one way to stand out to a seller who wants to get their property sold fast.
Buyers also use bridge loans to put 20% down on their new house, avoiding the private mortgage insurance (PMI).
Without the sale of their home, a buyer might not be able to come up with a 20% down payment. Bridge loans let them easily get into their new house as they try to sell their first one.
How does bridge lending work?
A bridge loan essentially helps you have two mortgages at once, in one of two ways.
The first scenario is that you take on a second mortgage and borrow the difference between your current loan balance and 80% of your home’s value. This amount can be applied to the downpayment on your new home.
The idea is that you are able to secure your new home with the mortgage on your first home. You’ll then pay off what you borrowed once your first home sells.
The terms of a bridge loan are often a 6-12 month time frame.
Another way a bridge loan can work is to simply roll two mortgages into one. This way, you’ll take out one large loan up to 80% of your current home’s value. You can then pay off your mortgage and the bridge loan’s fees, and use leftover funds for your new down payment.
One downside to a bridge loan is that they come with a higher interest rate than a conventional loan. Since buyers tend to pay these loans off quickly, however, the higher rate might be manageable.
Requirements for a bridge loan
Bridge loans can be helpful and convenient but lenders will be looking for specific things from their borrowers, such as:
- Low debt-to-income ratio (DTI)
- High credit score and good credit history
- High amount of existing equity
While specific numbers and requirements will vary with lenders, these are the main factors they’ll be looking at. It’s a good idea to pay down debts and work on your credit if you anticipate needing a bridge loan.
You’ll also need to have paid down a significant portion of your current mortgage principal.
Basically, lenders will want to see your financials in near-perfect shape to consider you for a bridge loan.
Bridge loans also require closing costs and origination fees, the same as a conventional loan. You’ll need to have enough cash on hand to cover those in order to get your bridge loan.
If you’re using this bridge loan to secure your new home, keep in mind that you’ll need enough to cover closing costs and fees for both the bridge loan and your new home, which may happen around the same timeframe.
How to find a lender to get started with a bridge loan
Rather than searching for lenders who do bridge loans, look at lenders or banks that you’ve used before and ask if they do bridge lending. Many of your local lenders may offer them.
A simple internet search may push you toward a hard money lender, which might have higher interest rates with their loans, but also provide more flexibility and speed.
After reviewing our bridge loan guide, you’ll want a lender you can trust, who will work with you to get you the best rates possible.
My Perfect Mortgage can take the stress out of that decision-making process for you.
Simply tell us about your situation and we will match you with a lender that is perfect for you. Get started on the road to your perfect mortgage today!