Bridge Loans and Other Finance Decisions When Selling a House
Author: Mlive | November 19, 2019
Bridge Loans and Other Finance Decisions When Selling Your Home
If you're selling your home while trying to finance a new property, you might feel overwhelmed. How can you finance a down payment and potentially pay two mortgages before your current home sells? Fortunately, a bridge loan can help ease this transition while you wait for the closing on your previous home. This quick guide from Get Movin Realty explains what you need to know about how to get a bridge loan and the other important financial considerations that come with simultaneously buying and selling homes.
What is a Bridge Loan?
A bride loan is a short-term loan taken out by a borrower against the value of their current home to finance a down payment on a new house. These loans are sometimes called gap financing because they are typically taken out when a borrower doesn't yet have the cash from the sale of their current house for a down payment or any of the other financial considerations of a sale. Bridge loans also allow a buyer to drop certain contingencies to expedite the sale of a house.
To learn more about how to get a bridge loan, consult with a trusted lender, as requirements vary. Unlike traditional loans that require a certain FICO score or debt-to-income ratios, bridge loan lenders typically rely on a more intuitive underwriting process. Most of the time borrowers qualify based on their ability to carry two mortgage payments if there is a mortgage on the first home.
Pros and Cons of Bridge Loans
Bridge loans are great for people who can manage the financial burden of two mortgages for a brief period of time. The available funds make it easier to handle the expenses of a home purchase without worry, even if your current house doesn't sell immediately. Bridge loans can also eliminate the contingency that you will only complete the purchase of your new home if your old home sells, making your offers more attractive. Interest rates are generally manageable for individuals with good credit and smaller debt-to-income ratios, although they're often a few points higher than a traditional home loan.
Still, bridge loans can have drawbacks. If your house does not sell in a timely fashion, you will carry a higher-interest loan for longer. You'll also need to make sure there are no pre-payment penalties in the loan's terms. If you have a higher debt-to-income ratio, you'll likely qualify at a higher interest rate. The same is true if your new purchase requires a larger home loan.
Think carefully about whether gap financing is a good choice for you. There are a number of factors to consider, including:
- The market: Selling your home in a buyer's market can delay your sale and make a short-term, high interest loan less appealing
- Additional costs: You will also need to pay for recording and transfer fees, repairs to your current residence, landscaping, and home staging.
- Your new mortgage: What kind of home loan will finance your new home?
If your cash flow will be tight between a sale and purchase and you're prepared to repay the loan, a bridge loan might be the right choice.
Real Estate Made Simple
Financing the purchase of a new home as you buy another can be difficult. Fortunately, selling your home doesn't have to be. Get Movin Realty uses modern technology to eliminate the middle man and put control back into your hands. If you're ready to list your home, contact us online or register today to get started.