You’ve probably heard the term “bridge loan” in the past and maybe you’re one of those who have taken advantage of one. But if you’re not familiar with a bridge loan, what they are and what they’re used for, it’s really a very handy financial tool buyers use to help finance a property they have in mind without depleting all of their savings. Or, the bridge loan can be used to offset some of the necessary funds needed in order to finance a new purchase. Let’s take a closer look at bridge loans and see how they’re used.
What’s a Bridge Loan
Bridge loans aren’t as common as other types of traditional financing and not all lenders offer them so it might take a little bit of research beforehand. A bridge loan is a form of temporary financing on an existing property. Much like a home equity loan, a bridge loan allows owners to pull out cash on a home to be used as a down payment on the new home without first having to sell the property. While that sounds remarkably similar to a home equity loan, many lenders won’t place a loan on any property that is listed for sale.
A bridge loan comes into play often when the buyers find a home they really want but need to sell their existing home first to come up with the funds for a down payment and closing costs. Instead of selling the home and perhaps losing out on their selected property, they can elect to take out a bridge loan which is used expressly for this purpose. A bridge loan helps get the buyers from Point A to Point B. In this instance, it’s financing the new home while the other home is waiting for an offer.
How It Works
For instance, a couple has their home listed for sale and it’s been on the market for a couple of weeks. There’s been some interest although no bona fide offers. They know the area where they want to live and they have a couple of homes in mind that are listed. Soon, they find a home in the perfect place priced below market- the sellers are obviously motivated. But they don’t have the funds needed for a down payment, even though they’re been preapproved for a new loan. We have lending sources that can provide bridge loan and it can be used to finance the next purchase while their existing home is waiting for an offer. They take out a bridge loan, use the proceeds to help with the down payment and closing costs.
The borrower would still need to qualify with their existing mortgage as well as the new one. They do in fact qualify for two loans at the same time. They make their offer, it’s accepted and they closed within 30 days. Two weeks later, their old home sells, paying off the existing mortgage as well as the bridge loan.
Can a Bridge Loan Help?
Not everyone can qualify for two loans at once but for those that can handle both payments and are looking to purchase another home in which to live, a bridge loan can help.