Bridge loans are a type of financing that has a unique purpose. And if you are in the process of both selling and purchasing a home, you may find a bridge loan essential to your financial health.
What is a bridge loan?
Like the name implies, a bridge loan connects – or bridges - one kind of financing to another. The most common use of bridge financing is when you sell your home and you take possession of your new home before closing on your current home.
For example, say you are about to close on the purchase of a new home, but your current home is still on the market. Chances are you were counting on money from the sale of your existing home in order to purchase the new one. But if your current home is still on the market, that option is not available. Lenders of bridge loans understand that you will soon have the financing your need from the sale of your current home and are willing to give you a loan to bridge the gap until that financing comes through.
A bridge loan is a short-term loan that an individual secures until the permanent financing is in place or a financial obligation is removed. It helps to allow the borrower to have the cash flow needed to meet whatever current financial obligations they need to.
How long is a bridge loan take out for?
Typically, bridge loans are very short-term financing, but they could be extended for up to a year. Bridge financing often has higher than average interest rates, so you want to make sure you pay them back as soon as possible and don’t use it for longer than you need to.
The lender of a bridge loan also, usually, requires some kind of collateral against the loan – like real estate.
How does Bridge Financing Work?
When you apply for your permanent financing, like your mortgage, one of our agents will discuss with you the option of bridge financing. When you have sold your home and have purchased another, the lender will need to know the dates you are taking possession and closing so that they can calculate how much time they need to extend the financing for.
Sometimes when you buy a home, you may take possession and close on the same day – but you might not either. The shorter the time between these two dates, the less it will cost you in interest.
How a bridge loan is different from a traditional loan?
Since bridge financing is used short-term to fill a gap until permanent financing is put in place, it is a little different from traditional loans. Bridge loans usually have a faster application process so borrowers aren’t left waiting to hear if they can proceed with buying and selling their home.
The approval process is also a little different and typically, bridge loans have a higher approval rating, but in exchange for that convenience, you will pay more in interest than you would for traditional lending.
While bridge financing is mostly used in personal real estate transactions, it is not unique to these kinds of financing deals. Companies can use bridge financing when closing a deal to make sure their transaction goes through. An example of this would be a business that receives a large order from a customer, but before the business can fill that order, they need to purchase a large amount of inventory. Since they may not have received payment from the customer yet, the business may need a bridge loan in order to help them fulfill the order.
When working with our brokerage to get your permanent financing in place, we will connect you with one of our lenders that specializes in bridge financing to help ensure that your home sale and purchase both go smoothly. If you need a bridge loan, we will shop our long list of lenders on your behalf to get you the best possible deal. Contact us today for a consultation.
How are Bridge Loans Calculated?
When you sell your home, you may have a certain amount of money still owing on your mortgage. In addition to what you must pay off on your mortgage, you will have closing and legal costs.
So the profit that you make from the sale of your home will be the total sale price you got from your home minus what you still owe on your mortgage and any closing and legal fees.
Most people plan on using this profit that they made from the sale of their home for a down payment on the home they are purchasing. This down payment is usually required in order to secure the purchase.
If you have not yet sold your home, you may require a bridge loan. The amount that you’ll need is determined by taking the amount of profit that you will eventually realize from the sale of your home and subtracting the amount of the cash deposit that you made. So, for example, say you made a $10,000 deposit, and you anticipate using $140,000 of the profit that you will make from the sale of your home toward your down payment – in that case, you would want to get a bridge loan for $130,000.
Your bridge loan will bridge the gap between when you need to make your down payment and when you close on the sale of your current home.
Requirements and Qualifications
When applying for a bridge loan, there is a maximum amount that you will be able to qualify for – and that is what you need for your down payment. You will also be limited to only the amount of profit that you expect to receive from the sale of your home.
Some lenders will also require that there be an agreed date by which you must sell your current home. They need assurance that your home is actually going to sell.
Other lenders may also require that they be the holder of your primary mortgage. In this case, the bridge loan will take the form of a second mortgage which you will hold in addition to your current mortgage with the lender.
For homeowners, getting a bridge loan is typically a very simple process. As long as there is sure to be sufficient profit from the sale of the home, you can usually find a lender who will provide a bridge loan in order to meet your financing needs for your new home.
Who offers Bridge Financing?
Oftentimes, you will be able to obtain bridge financing from your current mortgage lender, who will add the bridge loan in the form of a second mortgage to your current mortgage. If you are unable to obtain bridge financing from your current lender, there are also a number of private lenders who also offer it.
Getting a bridge loan in the form of a short-term private mortgage can be a good solution for quickly getting the cash you require to make your down payment.
In all cases, it is a good idea to sit down with a professional mortgage broker who can assess your needs and source the best form of bridge financing for you.
Three Examples of When You Might Need a Bridge Loan
While bridge loans are most often used to bridge the gap between buying a new home and selling your current one, there are different circumstances within this where you might need to pursue bridge financing.
Here are three examples in which a bridge loan might be needed.
Example 1 – The closing date on your home is two weeks from now
This is one of the simplest examples. You know that your home is going to close in the near future, but you’ve just found the home of your dreams, and you need to have a down payment available now.
To avoid losing the opportunity to purchase this beautiful home, you apply for a bridge loan for two weeks which is based on what you need for your down payment minus what you’ve made for your deposit.
You will pay a little higher interest rate during these two weeks, but it is such a short time period that the higher interest rate will barely be noticeable.
Example 2 – Your home has not sold yet.
In this scenario, you have found your dream home, but your current house is still on the market. Things are going more slowly than you expected, and you really don’t know how much longer your home is going to be on the market.
In this case, you would have to get a bridge loan for however long your home remains on the market. Since this timeframe is unknown, there may be less lenders available who are willing to offer such a loan. Working closely with your mortgage broker will be even more important in this scenario.
It is also important to understand that the amount of interest you could end up paying in this scenario could be considerably higher since you don’t know exactly how long you will have to hold the bridge loan for.
Example 3 – You had sold your home but did not have a good home inspection
This can be a tough spot to be in. You had an offer and expected certain closing date. But then something was discovered during your home inspection – something that made the buyer hesitant – or something that you’ll have to have repaired before the sale of your home goes through.
Meanwhile, you had the purchase of your new home all lined up.
But now, because of a poor home inspection, you don’t have the down payment that you thought you would.
In this case, you may need a longer-term bridge loan – six months to a year – to ensure that you have the down payment that you need for your new home while making any necessary repairs to your existing home to help the sale go through.
How the Buying Process Works with a Bridge Loan
The following is a step-by-step process which shows how buying a new home works when a bridge mortgage is required. Your particular process may vary slightly, but in general, this is how it works.
- You put your home up for sale.
- You get pre-approved for a mortgage on a new home. At this point, you should be talking to your mortgage broker about the possibility of a bridge loan in case it becomes necessary. This way, you can get an idea of exactly what you might be able to qualify for.
- You begin house hunting.
- You find a home that you would like to buy.
- If your home has not sold by this point in time, you can apply for your bridge loan before you submit your offer.
- Make an offer.
- If your offer is accepted, you will work with your lender to ensure that your bridge loan aligns with your closing date.
- Receive your bridge funding and make your down payment on your new property.
- Work with your real estate agent to get your current home sold so that you can pay off your bridge loan as fast as possible.
Advantages of Bridge Loans
Getting a bridge loan rather than waiting for your current home to sell has some advantages, including:
- It allows you to purchase the home that you really want should you find it before you close on your current home.
- It allows you to take more time with the sale of your home so that you can accept the best offer rather than being rushed into accepting an offer you may not like.
- It allows you to take your time moving into your new home rather than being rushed to make a move more quickly.
How We Can Help
If you are in the process of buying and selling a home, then getting bridge financing lined up in case you need it is a smart idea. Our professional mortgage brokers can secure your bridge financing and help ensure that you get a competitive interest rate. Contact us today to learn more.
Bridge Loan FAQ's
When applying for a mortgage we will discuss all aspects of your financial needs, including whether you will need temporary financing. We will discuss your options and how much it will cost. If you have questions at any time, we are here to help.
The down payment on your new home can come from the proceeds of sale of your current home, and the bridge loan is meant to be a temporary place holder for those funds. This is only a short-term solution, however. If you need to discuss the whole picture of your financing options, contact us today.
If you know you will need a bridge loan until you close on your current home, we will include that in your mortgage application. The lender will also often discuss that as they will need to know when and where the down payment is coming from. We will discuss all of that during your appointment so you know exactly what to expect.