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How to Bridge the Gap Between Buying and Selling
Our real estate agents know that financing is one of a homebuyer's biggest worries. It continues to be a concern even on your second or third home. In fact, homeowners have unique challenges when it comes to selling their existing home and buying a new one!
When there's a gap between the time you close on a new home and closing day on your existing one, it can introduce real financial peril. In many cases, this can stretch your budget to the breaking point. But even if the timing doesn't line up perfectly, you still have options you can pursue.
One of those is the bridge loan.
What Is a Bridge Loan?
Many homeowners try to ease the financial strain of buying by using the profit from the sale of their home to help them buy their next home. A bridge loan is a short-term financing option that literally "bridges the gap" between buying a new home and selling your previous one.
With the funding from a bridge loan in hand, you have the opportunity to buy before you sell. Even if you don't have the proceeds from your sale just yet, you can move forward with your goals. This helps ensure that the new home you want doesn't slip away due to a scheduling conflict.
How Does a Bridge Loan Work?
Getting a bridge loan is very similar to getting a regular mortgage loan. A lender (typically a bank) will look at your debt-to-income ratio, home equity, and other factors. Your payment history on the existing mortgage will be a big factor in assessing your credit risk for the new one.
Getting a bridge loan can be faster than getting an ordinary mortgage. That said, it's wise to compare lenders before you commit. Bridge loans are not typically covered by government lending programs like the ones that support first-time homebuyers, so they can have higher interest rates.
As always, the lower your interest rate, the more money you will save in the long run.
How Long Does a Bridge Loan Last?
A bridge loan is usually structured to last about a year before making the first payment. This gives you the time to apply the bridge loan funds to buy a home, then several additional months to close on the sale of your existing home if necessary.
Ideally, your transactions will provide you with most or even all of the money you need to pay off your bridge loan. However, interest will continue to accrue, and you may find yourself making payments for some time to fully settle the obligation.
Pros of a Bridge Loan
- Make Your Bid Count
A bridge loan can make your bid more attractive to sellers in a hot, fast-moving market. You won't need to add complicated financing contingencies to your offer and may even be able to compete against the bidders who have "cash in hand." - Save on PMI
You have the opportunity to avoid pricy Private Mortgage Insurance (PMI) on your new home if you put down 20%. You may be able to finance your down payment as part of your bridge loan, eliminating PMI costs that often range into the thousands per year. - Faster Financing Process
A bridge loan is highly likely to clear faster than a mortgage. This makes your timeframe much more flexible and takes some significant worries off your plate. That can be essential in making the right moves during your home sale.
Contact us to learn more today.
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