Bridge financing which is also known as an interim loan is gaining in popularity. When a home buyer is buying another home before selling an existing home, two common ways to find the down payment for the move-up home is through financing either a bridge mortgage or a home equity mortgage (or home equity line of credit).
Generally, a home equity loan is less expensive, but bridge financing contains more benefits for some borrowers. In addition, many lenders will not lend on a home equity loan if the home is on the market. Smart borrowers will compare the benefits between the two loans and determine which of these fit better for their particular situation and plan ahead before making an offer to purchase another home.
What Is A Bridge Loan?
Bridge mortgage is a temporary loan that bridge the gap between the sales price of a new home and a home buyer’s new mortgage, in the event the buyer’s home has not yet sold. The bridge loan is secured to the buyer’s existing home. The funds from the bridge loan are then used as a down payment on the move-up home.
How Does A Bridge Loan Work?
Many lenders do not have set guidelines for debt-to-income ratios. The piece of the puzzle that requires guidelines is the long-term financing obtained on the new home.
Some lenders who make conforming loans exclude the bridge mortgage payment for qualifying purposes. This means the borrower is qualified to buy the move-up home by adding together the existing loan payment, if any, on the buyer’s existing home to the new mortgage payment of the move-up home. The reasons many lenders qualify the buyer on two payments are because:
- Most buyers have an existing first mortgage on a present home.
- The buyer will likely close the move-up home purchase before selling an existing residence.
- For a short-term period, the buyer will own two homes.
If the new home mortgage is a conforming loan, lenders have more leeway to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50% debt-to-income ratio.
Average Fees For Bridge Financing
Rates will vary among lenders, but following is an average estimate for a bridge loan and interest rates fluctuate, but for this example, let’s use 8.5%. This type of bridge loan will carry no payments for four months; however, interest will accrue and be due when the loan is paid upon sale of the property. Here some of the possible fees:
- Administration fee: $750
- Appraisal fee: $375
- Escrow fee: $350
- Title policy fee: $350+
- Notary fee: $40
- Recording fee: $65
- Wire/courier/drawing fee: $75
Home Buying Benefits of A Bridge Loan
- The buyer can immediately put a home on the market without restrictions.
- Bridge loans may not require monthly payments for a few months.
- If the buyer has made a contingent offer to buy and the seller issues a Notice to Perform, the buyer can remove the contingency to sell and still move forward with the purchase.
Home Buying Drawbacks of A Bridge Loan
- Bridge loans cost more than home equity loans.
- Buyers will be qualified by the lender to own two homes and many will not meet this requirement.
- Making two mortgage payments, plus accruing interest on a bridge loan, could cause stress.
There are circumstances, however, where the buyer of the home you are selling runs into difficulty getting mortgage or other funds on the closing date and they are unable to close the transaction with you. When this happens, if you do not have bridge financing in place, you will not be able to close your new purchase because the funds from your sale are not available. This scenario is obviously not a pleasant one and can result in large costs for moving and storage fees, additional legal fees, financial penalties from the builder of a new home or vendor of a resale home that you are purchasing, cancellation fees for people installing appliances or security systems, not to mention the stress and anxiety that can occur because you are not able to move in to your new home. Sometimes much of these costs cannot be recovered from the buyer of your home.
We understand that real estate transactions cannot always be closed in sync with each other. In the event interim or bridge financing becomes a necessity, we can often work with a lender to obtain interim financing for you. Call the GLM Mortgage Group to set up a free consultation to learn more.