What is a bridge loan in real estate?
Are you considering buying and selling at the same time and need assistance covering the down payment for your new home? A bridge loan can help you tap into your current primary home’s equity and cover the gap between buying a new home and selling your previous one.
A short-term bridge loan can be used as a temporary tool until your current home is sold. Bridge loans can be an advantage in a competitive market because they allow you to make an offer on a new home that’s not contingent on selling your existing home.
How does a bridge loan for a home purchase work?
If you’d like to use your home’s equity for your down payment on a new home, you’ll find that the steps to get a bridge loan are similar to most mortgages.
- Connect with a loan officer: Guild Mortgage loan officers
have an in-depth knowledge of loan programs and their requirements and can
pair you with the one that best fits your needs. It’s never too early to
reach out to a loan officer to explore your financing options or get your questions answered. - Apply for the bridge loan: Once you decide to start
shopping for a new home and determine this type of home loan is right for
you, you can begin the bridge loan application process. You’ll need to
provide information about the property you’re purchasing, as well as your
income, debts and assets. Before approval, we’ll verify your income, assets,
debts, credit and home value. - Get an appraisal: A home appraisal will be ordered to
assess the current market value of your existing home. Your approved loan
amount is based on the equity in your existing home, your creditworthiness
and the value of the home you are purchasing. - Close on the bridge loan: Once approved, you will close on
the bridge loan and the new purchase on the same day. The funds from the
bridge loan on your current home can go toward the down payment and closing
costs on the new purchase transaction. - Repay the bridge loan: You’ll need to repay the bridge loan
when you sell your existing home within six months. The proceeds from the
sale will be used to pay off the bridge loan, including any interest and
fees.
Three reasons to use a bridge loan when buying a home
In addition to decreasing the stress of a new home purchase, you may consider a bridge loan for one of these reasons:
Timing
Have you found the right new home for the right price in the right place but are still waiting for your current home to sell? Or maybe the closing date for your new home is after the closing date for your existing home? A bridge loan can provide the necessary funds to act now to purchase your new home.
Down payment
According to the NATIONAL ASSOCIATION OF REALTORS® 38 percent of repeat buyers cited using the proceeds from the sale of a primary residence for the down payment of their new home. So if you need to move before your home sells, a bridge loan can help you come up with a down payment without tapping into your savings.
Competitive market
Homes sell fast in a low-inventory real estate market with high demand. Your real estate agent can alert you as soon as new homes hit the market, and a bridge loan can help provide the funds you need to make a non-contingent offer quickly.
Typical terms for real estate bridge loans
When researching loan types, you may come across these common bridge loan terms:
- Interim loans: Bridge loans are interim loans because they provide financing until you obtain permanent financing.
- Gap financing: Because bridge loans “bridge the gap” when financing is needed but not yet available, you may see them referred to as gap financing.
- Swing loan: A bridge loan is sometimes called a swing loan or swing loan financing.
- Short-term financing: Because bridge loans are designed only to provide financing during a transition period, they are also short-term financing. However, not all short-term loans are bridge loans. For example, credit cards, trade credit and small business administration (SBA) loans are also types of short-term financing.
- Hard money loan: A hard money loan uses a “hard” asset as collateral, such as real estate, a vehicle or business equipment. Not all hard money loans are bridge loans in real estate because they’re used for other purchases besides buying a home.
How much is a down payment when using a bridge loan?
When you take out a bridge loan to cover the down payment on your new primary residence, the down payment required varies based on what you are looking to do. Reach out to your loan officer to better understand how this would benefit your new purchase needs, whether you’re looking to put 20 percent down to avoid private mortgage insurance or as little as a 5 percent down payment.
What is a non-contingent home sale offer?
Contingencies offer protection because they allow you to change your mind about a home sale if something specified in the contract doesn’t work out. Appraisal, home inspection, financing and home sale are all common contingencies that often must be met before the sale of a home can be completed.
While it’s essential to weigh the risks of waiving any contingency, a bridge loan allows you to make a competitive offer that’s not dependent on the sale of your home. In a low inventory market, writing a non-contingent offer could get you the winning bid because it gives the seller a higher level of certainty that the sale will close.
What are the pros and cons of a bridge loan?
Pros
- When you’re relocating, a bridge loan provides the opportunity to take your time to move.
- Is your money tied up in your home’s equity? A bridge loan can help you seamlessly transition to your new home by giving you quick access to funds for a down payment.
- While you must repay a bridge loan within six months, there’s no penalty for paying it off early, and we encourage you to do so as soon as your home is sold.
Cons
- You may pay higher fees and interest rates for short-term financing.
- Taking on debt to buy a new home before selling your current one can be risky.
- Because a bridge loan is a short-term loan, you’ll need to refinance or find alternative financing if you don’t sell your home within the repayment terms.
Questions? Learn more about Guild Mortgage bridge home loan eligibility, then let’s talk!
The new first lien must be completed with Guild Mortgage on the new home purchase. The bridge loan must be repaid within six months of closing, and the departing residence must be listed for sale. Not eligible in TX. Second liens are not eligible in ME.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.