Are you planning to buy or build a new home? If you don’t have a lot of savings for cash buying, you will probably need some proceeds from your current home’s sale to help you afford your new home. However, buying a new home while at the same time selling your current home can be stressful and overwhelming. You might find yourself moving out temporarily from your current home before you can buy your next home. That’s why a bridge loan against your current home comes in handy to offer an easier alternative.
What is a bridge loan and how does it work?
A bridge loan is a form of short-term financing that is given to homeowners who need to sell their current home before they can buy a new one or build one. As a homebuyer, when you apply for a bridge loan, the lender uses your current home as collateral. The amount of bridge loan that you can qualify for will depend on your home equity. In most cases, bridge loan lenders give up to 80% of your current home value.
Since bridge loans help homebuyers fund their new home purchase even before selling their current home, it gives them a competitive edge during bidding as they are able to waive the sale of their own home contingency when making an offer for the new home.
A bridge loan can be used for a down payment, closing costs, clearing the remaining balance for your current mortgage, or cater for construction expenses for homeowners who want to build a new home.
Different bridge loan structures have different repayment formulas. Depending on your current situation, you can opt to pay back your loan either on monthly basis, pay interest-only, or as a lump-sum payment.
How to apply for a bridge loan
There is no formal structure for lending bridge loans. The requirements for any borrower differ from one lender to another. However, there are some common requirements that homeowners must meet in order to qualify for a bridge loan. One such factor is high credit score as they are much riskier to lend compared to other loan options. Lenders also prefer borrowers with a low debt-to-income ratio and high home equity.
There are some fees that homeowners pay when applying for a bridge loan. Some of the common ones include; administrative, appraisal, origination, interest, taxes, and various title fees. The amount charged will also vary with the lender and borrower’s current mortgage balance. For the best deals and rates, it’s always advisable for homeowners to shop around and engage various lenders before making their final decision.
What are the benefits of bridge loans?
If you are wondering whether bridge loans are the best option for your current situation, consider the following pros:
Pros of bridge loans
- They help homeowners from servicing two mortgages at the same time
- As a homeowner, you will not be in a much hurry to sell your current home
- When making an offer for your dream new home, you will not need a sale contingency thus, giving your bid a competitive edge
- You can continue staying in your current home while you shop for your new one or as you build
- Bridge loans have fewer formalities compared to other financing options
- It helps homebuyers make down payments without having to make a lot of savings