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What is a bridge loan?

By Richard Woodward NMLS#217454

Mortgage and Lending with Nexa Mortgage, NMLS #1660690 NMLS 217454

June 03, 2021 08:30 AM

Bridge Loans | How to Buy Your Next Home Using a Bridge Loan without selling first.

A bridge loan is often used in real estate transactions to provide cash flow during a transitional period, such as while moving from your current residence into your new home. Homeowners can use these short-term loans, which can help quickly put more cash in their pockets, to finance the purchase of a new home or pay off an existing debt obligation.

For many, it's a common misconception that you have to sell your old home to buy a new one. But with the help of a bridge loan, you can buy your next home without having to worry about selling the current one first. In this article, we'll explore how they work and what they can do for you!

The Richard Woodward Team wants to make sure you're well-informed on all your mortgage options, including bridge loans. Bridge loans are designed for the buyer who wishes to purchase a new home before their current one sells. This loan type is best suited for those buyers looking at homes that they know will require more than what's in their savings account and want an option with flexible repayment terms.

What is a Bridge Loan?

A bridge loan is a short-term solution to the problem of cash flow. Bridge Loans are commonly used by home-buyers who want to buy their new home sooner than later but don’t have enough money saved up for a large down payment on a new home. Bridge loans are short-term loans that use the equity in an existing home as collateral for the down payment on a new home. A bridge loan is usually in place for 3 to 12 months and comes with higher interest rates than do traditional permanent financing.

It's important to understand that, for many home sellers, it would be ideal if they could wait until their house is sold before buying a new one. If you can't sell your current property and facilitate the transaction with funds from the sale of your existing home though, bridge loans will provide you access to additional money so you'll have enough cash at hand to purchase a new home regardless. Basically put: Bridge loans give people who are stuck between properties entry into more resources which makes them able-bodied when purchasing another home.

Having a contingency to sell your home can be a deal killer and get your offer declined in this market. Sellers have multiple offers to select from and removing all contingencies or hurtles for them is crucial in putting forward a winning bid. A bridge loan is a perfect solution to this problem.

How Does A Bridge Loan Work?

There are several ways to finance the purchase of a home, but bridge loans are unique in that they don't require you to have cash, just equity. Bridge loans work by using your existing home as collateral and leveraging it against another property.

There are a couple of different types of Bridge loans.

The true bridge loan will require a loan against your current home and the new home simultaneously in one mortgage. The buyer must be able to qualify for both homes at the same time, but the true bridge loan payment is only calculated at interest-only payments. If you have an existing mortgage, that loan is paid off with the bridge loan. The new loan on both your current home and the new property can be up to 80% of the combined value. So for example. The current home has a value of $600,000 and an existing loan balance of $300,000. The new home has a value of $800,000. So the combined value is $1,400,000 of which a loan amount of $1,120,000 may be obtained. To finance the purchase, the buyer will need $800,000 for the new home and $300,000 to pay off the old loan which equals, $1,100,000, which is less than the maximum available loan. Therefore, a buyer would be able to finance this purchase with no funds for a down payment, they would only need to pay the closing cost. (No cashback is allowed in Texas).

Once the loan closes, the buyer moves into the new home and has time to settle in before listing the old home for sale. Now the old home has sold and the loan amount on it of $480,000 gets paid off. The buyer can then take the remaining funds of roughly $70,000 and apply that to the new loan on the new home. Since the new loan is a short-term loan, an adjustable-rate mortgage, and at a higher rate than normal, the buyer will need to secure permanent financing on the new home. They have a $620,000 remaining loan amount on the new home. They can refinance that amount to a new permanent loan or use the $70,000 cash from the sale of the old home to pay down on the new home and secure a $550,000 loan.

The second bridge loan option involves a HELOC.

A HELOC is a home equity line of credit. The buyer must be able to qualify for both homes and the HELOC payments for this to work. Be careful with this, as the current home can not be listed for sale with most HELOC lenders. If you need a lender that doesn't care, contact The Richard Woodward Team and we will take care of you. Instead of using a true bridge loan as detailed above, the buyer can secure a HELOC on the current home to use for the down payment on the new home. This option works best if the buyer has significant equity in the existing home. So for example. The existing home is worth $600,000 and there is an existing loan of $200,000. The buyer secures a HELOC on the existing home up to 80% of the value of the home which would be $280,000.

The buyer would then purchase the $800,000 home using the $280,000 HELOC money as the down payment and secures a new $520,000 loan. Once the exiting home is sold, they can take the available equity from the sale and make a large payment on the new loan. They can then request a recast of that loan from their new mortgage services to reduce the permanent payment. A recast is basically are restructure of the current loan to allow for lower monthly payments. This is normally a small fee associated with the recast and the request has to be done in writing, but it is more economically sound to take this route and the cost are less and there is no need to refinance into a permanent loan.

Ultimately, The Richard Woodward Mortgage Team wants to make sure you have the best possible home buying experience. Do we offer bridge loans? Yes, we do? But they are not always the best option. We use our years of experience, leverage our vast array of mortgage programs, review your needs, and help you select the best means of achieving your home buying goals. Remember, don't hesitate to contact us if there's anything else we can help with! We're always here for our customers.