Homeowners that are thinking about selling their home to buy their new dream home may want to consider a bridge loan.
So what is a bridge loan?
This is a temporary loan that is taken out by the homeowner and is used as the down payment for the new purchase. The bridge loan fills the gap between what the new home costs and the new home loan. The homeowner normally still has an existing loan on their current home but they have enough equity in the property to qualify for the loan.
Why get this loan?
When a homeowner is selling their home and are looking to buy a new home, contracts on both the sale of their home and the purchase of the new home will require additional contingencies that will either make it tough to get the right buyer or tougher to get their offer accepted on the new home. Sellers would prefer that their buyer is ready to go and is not waiting on the buyer’s home to go under contract or risk that it does not close. That may mean losing out on the perfect house. On the sell side, the existing home can show better because the home owners have already moved out and is adequately staged to show better. It may be more attractive to more potential buyers and there is no longer a contingency that the seller must find a new home to sell theirs. This could result in higher and better offers.
What’s the bad part?
The bridge loan can be costly and risky. When home’s are not selling as fast, the borrower could be stuck with two mortgages and be adding interest to the bridge loan. The alternative to getting a bridge loan would be an equity loan which typically carry less costs.
The bridge loan is not for everyone or for every situation. Lenders will evaluate this loan on a situational basis. Normally, I would stay away from the risks that exist in a normal to stagnant market. However, in today’s hot market, those risks are mitigated and depending on the situation of the homeowner, the bridge loan could be just the right answer.
Please contact me if you’re looking at options to sell and purchase a new property. I’ll be happy to recommend a lender or two for bridge loan options if that’s a consideration as well as other strategies to think about.