Bridge Loans

Bridge Loans

Home owners most often prefer to sell their home before they buy a new house, but this doesn’t always work out as planned. Many times, a home owner will find the home that they want to buy while their house is still for sale. There is a specific type of loan just for this situation. Bridge loans, also known as gap financing or a swing loan, are temporary loans used by the borrower to purchase their new home until they can sell their old home and make long term financial plans.

Bridge loans are not the only option available to homeowners who are transitioning between homes. Another option buyers may consider is a home equity loan. These loans are cheaper, but may not offer the same benefits as gap financing. Additionally, many lenders will not allow a home equity loan if the previous house of the home owner is for sale.

Problems With Bridge Loans

Bridge Loan Benefits

There are many advantages that you can get from a bridge loan when upgrading your home. Unlike with home equity loans, you can put the home on the market quickly without restrictions. With a bridge loan, you most likely won’t be making any payments for months. Buying home is easier without a contingency to sell.

Disadvantages of Bridge Loans

There are some downsides to consider when using a bridge loan to finance the purchase of a home. The borrower must be qualified to own both homes and have the income to cover both loans. Bridge loans are usually more expensive than other loan options. Also, if your home hasn’t sold by the time the payments are due on the bridge loan, it can be difficult to stay current with all the payments.

Advantages of Bridge Loan

How do Bridge Loans Work

Lenders will look at your credit and your DTI ratio. Different banks will have different requirements for their gap financing programs. Most lenders use common sense to assess whether the borrower will be able to afford the loan. With a bridge loan, you will own both properties for a few months, so you will be required to qualify to make both payments. Bridge loans are usually due within six months. If you haven’t sold your home by then, you may be able to delay the due date.

How Much do Bridge Loans Cost

A bridge loan will typically have an interest rate a couple points higher than a traditional, 30-year fixed rate loan. Other fees with gap financing such as appraisal fees, escrow, and recording fees will also be higher than most other loan programs, usually about 1% of the total loan amount.

How do Bridge Loans Work
 
 
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