What is a Bridge Loan

Tamsen Butler
Bridge

What is a bridge loan? It's one of the best options for people who find themselves in the situation of purchasing a home while still owning another home they intend to eventually sell.

Bridging the Gap

Current homeowners may potentially find themselves in need of a bridge loan for a variety of reasons:

Buying a Home

Homeowners may want to move from their current homes and into another, but run into trouble when the time comes to sell their current home. For example, if you are in the market to buy a larger home and you find the perfect home for your needs - but it just so happens that the sellers want to sell now and your current home hasn't been sold yet - you'll need to find a way to secure financing on the new home while still covering your current mortgage. A bridge loan allows you to tap the equity in your current home. The loan is payable in full upon the sale of your current home.

Building a Home

Some people choose to commission the building of a new home instead of buying a home that has been lived in before. If you already own a home, however, you need to find a way to secure financing dependent upon the sale of your home. This type of loan is referred to as a construction loan and is approved based upon the potential sale of your home. In other words, your debt-to-income ratio may be too high with your current mortgage payment to get approved for the loan for your new home, but with a construction loan the assumption is made that the home will be sold prior to the completion of the new home. If the home does not wind up selling in time you may need to explore the option of a bridge loan until you can sell your current dwelling.

What is a Bridge Loan Application Like?

A bridge loan application can be just as lengthy as a first mortgage loan, and there are not many lenders who willingly offer bridge loans on a regular basis. For this reason you may have to do some research before you can find a lender who will have a bridge loan application for you to fill out. There are some online lenders offering these types of loans, but you need to be cautious with lenders with which you are unfamiliar, especially online. You should also keep in mind that not every website offering bridge loans is a lender who deals with mortgages. The term also pertains to other financial endeavors.

A Temporary Solution

What is a brige loan drawback? Bridge loans are not meant to be long-term, and usually have very short amortizations. You should expect to encounter relatively high interest rates, less-than desirable terms, and a good amount of associated fees. Remember that this loan is relatively risky for lenders since there is no absolute guarantee that you will be able to sell your current home, so lenders attach higher fees and interest rates to these loans than they do to traditional mortgage loans.

Alternatives

Although bridge loans can be a viable option for homeowners who have no other choice, you may be able to find alternatives which can potentially wind up saving you money. Some homeowners turn to equity loans and equity lines of credit in order to get the money they need to make a down payment on a new home, and for people who have a low enough debt-to-income ratio to afford both mortgage payments this is a viable option.

If you can avoid needing a bridge loan in the first place you may be better off; one option is to sell your current home first and then stay in a temporary rental while waiting to find another home to buy. If you absolutely need to obtain a bridge loan, be sure to ask plenty of questions to the lender to make sure you fully understand what you are getting yourself into.

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What is a Bridge Loan