You convince yourself you’re just going to look at the house. You’re not going to fall in love with it, you’ll just go look, that’s all. But, as soon as you walk through the front door, you know. It’s perfect. It’s screaming your name and “just looking” is no longer an option on the table. There’s just that one, little, tiny issue of your current house that you haven’t sold yet. It happens. Thankfully, there are ways to help the stars align in your favor; one example being a bridge loan.
A bridge loan is a short-term loan used to “bridge the gap” until either permanent financing can be acquired, or an existing obligation is released. Bridge loans have also been referred to as swing loans, gap financing, or interim financing. The most common use for bridge loans in real estate is for this very scenario; when a buyer is wanting to purchase a new home before selling their current one. There are situations where a buyer simply wants to buy a new home and move into it without the stress of selling their current one first. However, they’re most commonly used to avoid losing the ability to purchase a new home due to contingency to sell. If you have a contingent offer on a home and the seller issues a Notice to Perform, you can use a bridge loan to remove the contingency, allowing the sale of the home to continue to move forward. However, not all sellers are willing to accept an offer with a contingency attached to it, especially in a hot market. The bridge loan allows the seller the comfort of knowing that they will be able to sell their home without worry of the buyer having to first sell their property.
With bridge loans, the current property is used as collateral. There are a couple of ways to set up a bridge loan. You can either take out a larger loan and pay off all existing mortgages and liens on the original property and use the remaining funds as the down payment on the new property or you can open a smaller loan, treat it as a second or third mortgage, and use it as the down payment on the new property. In the first scenario, you will usually not have to make payments on the bridge loan, but will simply make mortgage payments on the new home. When the original house sells, you will use the profits from that house to pay off the bridge loan, including its fees and interest. In the second scenario, you will need to pay your original home’s mortgage along with the mortgage of the new home until the original home sells. The loan is usually for a term of 6 months, but can extend as long as 12 months.
Seasonality plays a huge role in the market. When the market is hot and homes are typically selling within a month of listing, a bridge loan may not be necessary. But as it cools, a bridge loan may just be the key to landing your dream home.
As with all types of loans you establish, know the terms of your loan. Some loans have higher interest rates, varying lengths, and could contain prepayment penalties. Research your options and understand how they work. Don’t rely on what you may have heard in the past.
Ask a professional if you have any questions to ensure you choose the right loan for your specific need.
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Source: Robertson, Colin . Bridge Loans [Blog post]. Retrieved from http://www.thetruthaboutmortgage.com/bridge-loan/