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How do bridge loans work

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Use of a bridge loan is becoming more and more frequent in today’s world of residential lending. The term “bridge loan” refers to a particular type of secondary loan to use as a down payment on a new residential property. If you have heard of a bridge loan but are unsure of what it entails, the following information will give you a thorough introduction.

What Is A Bridge Loan?

These types of loans are temporary in nature, and intended to cover the gap created when a homeowner’s property has not sold prior to moving into a new home. When the property owner’s current home is up for sale, he or she may decide to purchase a dream home but will not have the funds to complete the sale transaction due to the fact that they have not received any money off a previous sale. The bridge loan accommodates a buyer in this position by covering the difference between the price of the new property and the new mortgage loan.

Bridge loans are secured by the property interest in the home intended to be sold. Once the loan is funded, the homeowner (or buyer) will use the funds to place a down payment on a new home.

The Workings of Bridge Loans

When obtaining finance for the new home, it is common to leave out the bridge loan payments in the qualification process. Thus, the buyer’s creditworthiness is determined by joining only the current mortgage payments

and those of the new property. Where the new mortgage is a conforming loan, there is more flexibility for lenders to issue approvals. Those seeking a jumbo loan (for amounts surpassing the limits set by Fannie Mae and Freddie Mac) will face tougher debt-to-income ratios.

What Is The Cost Of A Bridge Loan?

It is difficult to list rates and fees with any amount of certainty due to the wide range of numbers affected by geographical factors. Typically, interest is deferred until the first property is sold. Then, the homeowner will be responsible for any accrued interest after the sale is finalized. In addition to interest, a homeowner can expect to pay for all the common expenses associated with a new mortgage. This includes origination fees, appraisals, escrow, recording fees, title policies and etc. Thus, if you want to know the true cost of obtaining this type of loan in your area, you’ll need to consult a mortgage lender for specific rate information.

The Pros Of A Bridge Loan

These types of loans can be quite beneficial for the right type of buyer. The first obvious benefit is that you can buy a home immediately without having to wait for escrow to close on your current property. You can also benefit from the initial grace period (usually a few months) for payments which is provided by many bridge loans. It can also make it easier to go forward with the sale process when a contingent offer is on the table.

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