Why Get a Bridge Loan?
What is a Bridge Loan?
A Bridge Loan provides a way for you to use the equity in your old home to fund a down payment for the new home you are planning to purchase.
Bridge loans are a short-term option that homeowners can use to “bridge” the time gap between buying a new residence and selling an existing one. In essence, this loan option allows a borrower buying flexibility by rolling multiple mortgages together while waiting for a property to sell. A bridge loan is either secured by the new property a buyer is purchasing or by a buyer’s existing property. With a bridge loan you get “credit” for the equity in your old home even though your old home is not sold. Most bridge loans are good for up to twelve months and have slightly higher interest rates than a traditional conventional loan.
A bridge loan can also be used for self-employed and 1099-contractor buyers to cover the period between when they want to buy a house and when they have 2 years’ worth of tax returns to qualify for a conventional loan.
This provides a viable way to temporarily own both homes – you simply pay off the bridge loan with the proceeds when you sell your original home.
Benefits of using a Bridge Loan
- Avoid having to sell your old home before you buy your new one
- Your current mortgage payment may not count for qualification on your new loan
- Avoid moving two times
- Apply equity from your old home to your new property
- Get the lowest possible rate on your new loan (by keeping your new loan amount under $453.1K)
- Avoid the need for contingency contracts that can make sellers uneasy
- Use your equity for an “all cash” offer preferred by sellers
Pros and Cons of Bridge Loans
Bridge loans allow homeowners to look for and purchase a new home without being financially constrained by the sale of their existing home. Bridge Loans are a great way to stay competitive in a ‘hot-market’ where quick financing – provided by the faster application, approval, and funding process – is attractive to sellers. If a Buyer has made a contingent offer to buy and the Seller issues a Notice to Perform, the Buyer can use a bridge loan to move forward with the sale and remove the contingency.
Although more heavily used in commercial transactions, Bridge Loans have been used in residential settings when Buyers are:
- Certain their existing property will sell quickly
- Looking for a competitive edge in a highly active market
- Need to move for personal or work reasons and do not have time to wait for their previous home to sell
- Need equity from their old home to purchase a new home
- Retired on a fixed income and cannot quite qualify for a traditional mortgage
- Self Employed for less than two years and do not qualify for a traditional mortgage but want to buy now
- A 1099 (contractor) employee status recently changed from a w-2 employee status and do not qualify for a traditional mortgage but want to buy now
- To allow you to buy a new home even though the buyer fell through on your old home
While more flexible and convenient than their traditional counterparts, Bridge loans do require fees, elevated interest rates, and a term limit. Furthermore, buyers looking to use this option must have the financial health to be able to make payments on their old home and their new home. Lasting up to twelve months, Bridge loans function under the assumption that Buyers will be able to quickly sell their existing properties – or qualify to refinance the bridge loan in the near future for Self-Employed and 1099 borrowers – and only need a short-term loan option to bridge their transition. For this reason, bridge loans are riskier from a lender’s perspective and consequently come with higher rates than a conventional loan.
Qualifying for a Bridge Loan
In most cases, lenders only offer loans for 80% of the combined value of the two properties, meaning borrowers must have significant home equity in the original property or cash on hand to invest as equity in the transaction. Buyers will be qualified by the lender to own two homes and must be able to pay what is essentially two mortgages rolled together. Due to the additional financial strength required to float two mortgages, most lenders require a solid debt-to-income ratio and a moderate to high credit score.
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What Bridge Loan programs are available?
We aim to serve our clients with the understanding that each client might have different needs, desires, and circumstances. For this reason, we have created a number of Bridge Loan programs to suit a variety of circumstances. Each of our bridge loan programs is uniquely designed to fit circumstances our clients have described throughout the history of our company. If you have a unique circumstance not listed or identify with multiple programs, please contact us to see how we can best serve you.
“Move Up Buyer” Bridge Loan
If your current property is too small but has a lot of built up equity and you are eager to purchase a new home that fits your growing needs, a Bridge Loan is a great way to secure a new home without waiting for your existing property to sell. Hurst Lending provides bridge loans that consider your existing property’s equity so you can use the money to secure a new home that is able to fulfill your needs. This program gives you “credit” for the money you have invested in your existing home to put towards your dream home. Using a bridge loan allows you to secure a low-rate, no-PMI conventional loan for your new home because, between your small down payment and our bridge loan, you can put 20% down on your dream home. Then, as soon as the home you’ve outgrown sells, the bridge loan is paid off! This option is also a great way to stay under the Jumbo loan limits.
If you’ve settled into retirement and life on a fixed income and have found you cannot qualify for conventional loans, a bridge loan can help you move closer to family and quality medical care. Hurst Lending created this bridge loan option to ensure you get “credit” for the home equity you’ve spent your life building and to make moving closer to loved ones possible, regardless of a fixed income. This option creates a new, 1st lien bridge loan on a new home in the right location that is paid off when your old home sells. For example, if you own a $500,000 home that is completely paid off, but too far away from medical care or family, and have found the perfect $250,000 house or condo near relatives, but cannot qualify for a conventional loan based on your social security income, a short-term bridge loan allows you to use the equity in your current home before it sells to secure the right home in the right location. Then, as soon as your old home sells, the bridge loan is paid off!
Bridge Loans for the Self-Employed or 1099 Contractors
Making the decision to be an entrepreneur is difficult enough without worrying about qualifying for a traditional mortgage when you need to move. As you may have already discovered, if you have been self-employed for less than two years or recently changed statuses from a w-2 employee to a 1099 contractor you may not qualify for a traditional mortgage – even if you are financially able and want to buy now. Hurst Lending created a bridge loan option tailored to help you move into your dream home. Through this program, you can use a bridge loan to purchase your dream home and refinance into a conventional loan as soon as you can qualify with two years’ worth of tax returns. As a family-owned company, we believe in helping to ensure entrepreneurs and contractors are not penalized for lack of tax history when they are able to, and want to, move now.
If you have your new dream home under a contingency contract and the buyer for your old home has fallen through, we have a loan program to help you buy your new home. With this program, we offer a bridge loan to allow you to close on the purchase of your new home while you find a buyer for your old home. With this program, we take into consideration the equity from your old home and allow expanded loan ratios to qualify for the bridge loan to purchase your new property. When your old home sells we then refinance you into a low rate conventional loan and pay off the bridge loan.
Home Equity Line of Credit (HELOC) Vs. Bridge Loan
A Home Equity Line of Credit (HELOC) is often considered an alternative to Bridge Loans and are a great option if a borrower has not yet put their old house on the market. HELOC loans use equity built up in property as collateral for a loan to withdraw a large lump sum of cash. This money can be used for any reason, including the purchase of a second property. Using a HELOC, a buyer can create a second loan for a percentage of the equity built up in their existing home to use in the purchase of a new home. This loan can be repaid upon the sale of the existing home, much like a Bridge Loan. The problem is that few, if any, lenders will provide a HELOC to a borrower who has their house listed for sale. HELOC lenders do not want to spend the time and effort to put into place a HELOC loan only to have the borrower pay off the loan as soon as their house sells. If you are wondering whether a bridge loan or a HELOC loan is the best option for your situation, do not hesitate to contact a Hurst Lending Mortgage and Insurance expert to help you decide how to move forward toward purchasing the home of your dreams.