It’s a homeowner’s dream to be able to purchase their new home before selling their current property. After all, who wouldn’t jump at the chance to move at your own pace, to vacate the home and avoid the hassle of de-clutting and staging your current home, as well as the inconvenience of having to clean and leave every time there’s a request to show the home?
The problem is, most of homeowners won’t qualify for both loans and will need to tap into the equity in their current home to make this dream a reality.
Can it be done? Absolutely. There are a handful of financing options that can reverse the normal sell-then-buy scenario. A bridge loan is one such option.
Again buyers typically take out bridge loans so they can buy another home before they sell their existing residence.
Many sellers won’t accept such a contingent offer in a seller’s market like the one we are currently in. Having a bridge loan in place can make your purchase offer more attractive, and allow you to compete with buyers who don’t have a home to sell.
While all this might sound like an ideal solution to a temporary cash crunch, it is not without risk. Bridge loans are popular in sellers markets when demand exceeds supply, but you should consider several factors before determining that one is right for you.
What Is a Bridge Loan?
To put it simply, a bridge loan “bridges the gap” between sales. Homebuyers use these temporary loans to finance their new home while waiting for their current home to sell (or in the event the buyer’s existing home hasn’t sold before closing).
In other words, you’re effectively borrowing your down payment on the new home before your old home has sold.
Weighing the benefits and drawbacks of a bridge loan may help you decide if it makes sense for you.
How do Bridge Loans work?
Not all lenders have set guidelines for minimum FICO scores or debt-to-income ratios for bridge loans. Funding is guided by more of a “does it make sense?” underwriting approach. The piece of the puzzle that requires guidelines is the long-term financing obtained on the new home.
Some lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. The borrower is qualified to buy the move-up home by adding together the existing mortgage payment, if any, on their existing home to the new mortgage payment on the move-up home.
Many lenders qualify the buyer on two payments because most buyers have existing first mortgages on their present homes. The buyer will likely close on the move-up home purchase before selling an existing residence, so the buyer will own two homes, but hopefully only for a short time.
Not every lender packages a bridge loan in the same way. When it comes to these loans, what’s important is whether or not they make sense for the individual’s specific goals and needs. However, there are two popular options lenders use with buyers.
The first option, a lender provides funds that equal the difference between up to 80% of the buyer’s home value and their current loan balance. The second mortgage goes towards the down payment for the second home, while the first mortgage stays the same until the home sells and the mortgage is paid off.
The second option, buyers take out one loan for up to 80% of their home’s value. With that money, they pay off their first mortgage. The funds for the second mortgage are then applied to the down payment for the new home.
Pros & Cons of Bridge Loans
Like with any loan, there are positives and negatives. The main benefit of a bridge loan is that buyers can put in a “contingency-free offer” on a new home, without selling their existing one. This means buyers don’t have to wait to purchase their dream home until their old one sells. With that said, a bridge loan carries a higher interest rate and only lasts between six months to a year. And even if your home doesn’t sell during that time, you’ll have to pay back your loan (though an option here would be to sell to an iBuyer and Trade-In Your Central Ohio Home). You also have to qualify for two homes and be able to afford two mortgage payments at once.
Average Fees for Bridge Loans
Rates will vary among lenders and locations, and interest rates can fluctuate. For example, a bridge loan might carry no payments for the first four months, but interest will accrue and come due when the loan is paid upon sale of the property. Fees also vary between lenders.
Here are some sample fees based on a $10,000 loan. The administration fee is 8.5% and the appraisal fee is 4.75%. Certain fees will be charged at a higher rate than others.
Bridge loan fee examples based on a $10,000 loan:
- Administration fee: $850
- Appraisal fee: $475
- Escrow fee: $450
- Title policy fee: $450+
- Wiring Fees: $75
- Notary fee: $40
There’s also typically a loan origination fee on bridge loans. The cost is based on the amount of the loan, with each point of the origination fee equal to 1% of the loan amount.
Generally, a home equity loan is less expensive than a bridge loan, but bridge loans offer more benefits for some borrowers. In addition, many lenders won’t lend on a home equity loan if the home is on the market.
** Interested in learning about a no cost strategy that can actually increase the price at which your home sells, as well as the dollar value our client’s net from the sale? (while allowing you to locate a home to buy before you sell, or preventing the need to move into temporary housing) Call us today at 614.332.6984 for details as this strategy is one we reserve exclusively for our clients!
The Bottom Line
If you don’t have the cash and your existing home hasn’t sold, you can fund the down payment for the move-up home in one of two common ways. First, you can finance a bridge loan. Second, you can take out a home equity loan or home equity line of credit.
In either case, it might be safer and make more financial sense to wait before buying a home. Sell your existing home first. Ask yourself what your next step will be if your existing home doesn’t sell for quite some time. You’ll be financially supporting two residences.
If you’re sure your home will sell, or you have a plan in place in case it doesn’t, the main advantage of a bridge loan is that it allows you to avoid a contingent offer along the lines of, “I’ll buy your home if my home sells.”
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235