Many homeowners who are buying a new home where they'll live depend on money from the sale of their current home. The problem is closing dates don't always coordinate due to delays by the lender or borrower. When that happens, and it does a lot, you can find yourself losing the home you really want.
What is a Bridge Loan?
A bridge loan is a short-term loan secured by the equity in your current home. The lender allows you to access that equity and use the funds for the house you're intending to purchase. Some lenders call them gap financing, an interim loan, or a "swing" loan.
"If you make an offer to a seller and include a contingency that they wait until you sell your house they'll probably say, "No. Not in today's market" says Brian Westre of Sotheby's International Realty. "A bridge loan is a way for you to submit a strong competitive offer for a house so you don't lose it to another buyer."
If you don't qualify for a traditional loan & have equity? There’s still a viable path.
How does a bridge loan work?
Bridge loans typically have short loan terms from six months up to twelve months. You will sign an agreement at closing to repay the loan immediately after you sell your existing home.
No more waiting on your home to sell
In 5 steps, here’s how a bridge loan works.
- You apply for a loan to access up to 70-percent loan to value of your home.
- You put your home up for sale with a local real estate agent.
- You have an appraisal done on your home to confirm the value.
- You receive a loan based on the appraised value for your next home purchase.
- You fully repay the loan within 6 to 12 months or once your old home is sold.
Standard Bridge Loan Program
Borrower(s) provide the lender copies of their most recent 2 years of tax returns, W2 & paytubs if applicable, and 2 months of personal bank statements. Ideally, the borrower(homeowner) will need sufficent equity in their home up to 70 LTV.
- Properties valued above $1 million are capped at 65-70 LTV.
- Your income does not need to qualify.
- Minimum loan amount $1,000,000 (primary residence); $400,000 for rental properties
Cross collateralizing Bridge Loan
Borrower(s) will provide the same information as above and will need to qualify based on their income and type of employment. The bridge loan for a home purchase is put on both properties until your current home is sold whereby you will repay the bridge loan.
Review these home buying scenarios
The following are three examples of ways to use a bridge loan. (Note: These are merely hypothetical to drive the point home how a bridge loan could work. and don't take into account the interest payments and fees you would pay on an actual bridge loan.)
Example #1: cross-collateralizing. Let's assume your current home is worth $450,000, and you owe $120,000 which leaves you with $330,000 in equity. You find a home in the right neighborhood that you want to buy that costs $560,000.
You want to make a down payment of 25% or $112,000 but your savings account only has $40,000, and you haven't sold your home and you don't have a buyer yet.
You can apply for a bridge loan for the $72,000 difference, or more to account for closing costs, to buy your new home. After that, once your old home is sold, you can use the net sales proceeds to repay the bridge loan in full.
Example #2: Your current rental home is worth $900,000 and you have $700,000 in equity. The new rental property you want to purchase is $1,400,000 (after negotiating it down from $1,600,000), and you want to make a strong offer with a $400,000 down payment or 30%.
The maximum the lender will allow is 70 LTV. With the $200,000 existing loan the maximum is a bridge loan of $430,000. This means you'll owe $430,000. $430k/$900k = 48 LTV. Once your existing rental property is sold, you take those proceeds ($900,000 - $430,000 = $470,000) to pay off the $430,000 bridge loan.
Example #3: Your current home in Southern California is worth $2,500,000 and you owe $700,000 which means you have $1,800,000 in equity. You have to relocate to Texas and found a new home in a competitive area of Austin that costs $1,000,000. Your realtor wants you to give a strong offer and with your equity you can pay all cash.
So you take out a bridge loan for $1,000,000 on your current home to purchase the Austin home quickly. You end up selling your old home months later for $2,400,000 and you pay off the existing first loan of $700,000 and the bridge loan for $1,000,00. You have $700,000 from the equity in your previous house (minus closing costs, interest, and fees).
UPDATE: Now borrowers also have a 3rd Option; access to a 12-month bridge loan with no payments required. There's just a ballon payment at the end of 12 months. This helps borrowers who have low income and high debt to income ratios.
Hopefully these examples add up to how it works.
Ideally, you want to have your bridge loan approved and have the funds within 1-2 weeks before you buy the next home. If you put in an offer to buy a home, then apply for a bridge loan you are putting more pressure on yourself as the process can take 2 to 3 weeks.
Pros and cons of the residential bridge loans
There are pros and cons to consider when looking into bridge financing to buy your next home. Here's an honest look at the benefits and drawbacks of these swing loans.
Benefits
- Move One Time– Let's face it moving is not something people enjoy let alone go through it twice a few months apart. "When you sell your home first, then move your stuff into an apartment, or put it in storage, then buy another home, the moving process starts again. A bridge loan helps you avoid that," explains Keeton.
- Speed – Since bridge loans are based on your home's equity and secured by your current home, they usually get approved and funded very quickly as in 2-3 weeks. There not any tax returns or income to debt ratios to calculate for qualifying.
- Stronger Offer– Making an offer using a bridge loan is more attractive to a seller; The seller has less steps involved in credit or income guidelines to be concerned about.
- All property uses– Able to buy as a primary residence, second home, or investment property (SFR, condo, or 2-to-4 units).
Drawbacks
- Interest rates– Bridge loans have higher interest rates than a typical conventional loan or home equity loan.
- Higher fees – the fees are much higher ranging from 2 - 4 percent of the loan amount.
- Credit score– you'll likely need a credit score of 680 or higher to be eligible
- Two mortgages- you'll have two mortgage payments until your old home sells.
Is it easy to get approved?
The truth is as long as you have a good credit score, sufficient equity in your home, and some income it's an easy process. Your home's equity is the most important. Your income not as much a factor as a conventional loan. Even if your income is less than the new bridge loan payment or both homes, you may still be approved.
The typical requirments are:
- FICO credit scores above 680
- Minimum loan amount of $200,000 up to $10 million
- No derogatory credit in the last 24 months
- No Foreclosures or bankruptcies in the last 4 years
Who should get a bridge loan?
You should strongly consider getting a bridge loan if these 3 factors apply to you.
- your home will not sell quickly
- the home you want to buy is an area with strong buyer competition
- if you don't want to move your furniture and belongings twice
How much does a bridge loan cost?
Because the loan is largely based on your home's equity the fees range from 1.75 to 3% of the loan amount.
To give you an idea, here’s how much you need to have:
- credit report: $22 (or up to $44 for 2 borrowers)
- appraisal: $500-$800 (price depends on appraiser's bids in your area)
- underwriting: $1,650
- discount fee: 1% of loan amount (loan of $500,000*.01 = $5,000)
- origination fee: 1-2% of loan amount ($500,000*.02 = $10,000 )
What to look for in a residential bridge loan lender?
Just because a lender offers bridge loans does not mean they'll approve your application. These type of loans are not among the typical residential loans originated each month such as a conforming, jumbo or non-qm loan. It’s best to use a mortgage company or broker that has had this loan available for years from their pool of lenders who specialize in short term equity based loans.
- Low interest rate relative to other bridge lenders
- Interest only payment option
- Speed to closing
- Flexibility to extend loan term
- Experience and easy to reach
Which states is this available in?
We will have a loan officer help you if the property is located in Arizona, California, Colorado, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, South Carolina, Washington, Tennessee, and Texas.
Disclaimer –This is not a commitment to lend. Not all borrowers will qualify. All loans are subject to underwriting approval. Loan program guidelines are subject to change without notice.