The average American home spends just 64 days on the market, from list to sale. This number changes depending on where you live. In California, it’s 36 days, although it can take almost twice as long in Honolulu.
All across the nation, this “days on market” figure is a sign of just how competitive the housing market is these days.
For many homeowners looking to make the leap to a bigger property, the speed of the market can pose a challenge. If the perfect house is listed today, you need to act fast.
A mortgage bridge loan could be the financial solution to landing your next piece of real estate.
What is a Mortgage Bridge Loan?
With bridge loans, it’s all in the name. This type of loan helps you bridge the gap between selling your existing home and closing on your new home.
They’re most useful in a hot real estate market, like the ones you’ll find in almost every major US city today. You need to put an offer in now and close the deal, but you’re still saddled with your current home.
The seller of your dream home may not accept contingencies on your offer, like waiting for your home to sell. They may get another offer without these contingencies and be able to close the deal sooner.
If you’re looking to sell your current home before buying your next one, a short-term bridge loan could be the answer.
Spanning the Gap between Closings
Suppose you want to put an offer in on your dream home in Dallas. You know you need to sell your current home to free up your capital. Doing so will let you pay off your existing mortgage and give you the flexibility to make a down payment on your new home.
You also might not be able to sell your current home fast enough, and the seller may not accept your conditional offer. Your dream home could be gone in the blink of an eye.
This is exactly the type of situation where a real estate bridge loan helps. You can use the loan to pay off your existing mortgage, with any excess becoming the down payment on your new house.
Qualifying for a bridge loan usually requires you to have equity in your home. For example, in the case of a $500,000 home with $300,000 on the mortgage, you’d have $200,000 in equity.
Typically the largest bridge loan you can get is 80 percent of your equity, so you could put $160,000 to the down payment on your new home in the example above.
How it Works
Mortgage bridge loans are short-term loans. They’re designed to help you bridge a gap, such as time between closings or to pay a higher purchase price. That’s why they’re such a great option for homeowners looking to upgrade.
Typically, the bridge loan offers payment flexibility. You can pay it off after selling your existing home or after obtaining long-term financing for your new home. The lender might offer you a few months of no payments as you wait to sell your home.
Bridge loans usually have higher interest and payments than a long-term mortgage loan, such as a 30-year fixed mortgage. Since you’re effectively paying two mortgages, you may feel some financial strain.
The bridge loan is a short-term financial measure. The term is usually six months to a year. The length of time will depend on a few factors, including the lender.
In the ideal situation, you’ll sell your house quickly, and you’ll be back to paying one mortgage. Since the real estate market is hot right now, it’s a good time to consider a bridge loan.
Tips for Using a Bridge Loan Effectively
Like other types of home loans, a bridge loan is debt and comes with risks. One risk is that you can’t sell your current house and are forced to make payments on two loans for a long period of time.
These bridge loan tips will help you make the most of this financial option. Before you sign on the dotted line, make sure to ask:
- How fast are houses selling? Bridge loans are best in fast-moving real estate markets.
- Can you handle two mortgages? A good rule of thumb is to make sure you can handle two payments for up to a year. While you hope to sell faster, you should be prepared to wait if your selling process takes longer than expected.
- Do you have other options? A bridge loan for a mortgage is the right option for some sellers, but it’s not for everyone. Other types of house loans, such as home equity loans, may meet your needs.
Knowing these answers will help you decide if a bridge loan is right for you.
Finding a Lender
Another key to using a real estate bridge loan effectively is making sure you’ve partnered with the right lender.
Mortgage bridge loans tend to be niche products. Few big banks offer them.
There’s also a good deal of flexibility in what different lenders offer. Not all lenders require a minimum FICO score or a particular debt-to-income ratio.
Shopping around is the best advice when it comes to finding a lender. Good advice is to start shopping for local lenders. Always be sure to ask about terms and fees.
Discover Your Home Loan Options
A mortgage bridge loan is just one of the many choices you have when buying a new home or upgrading your property. If you’re thinking about buying or selling in the Texas, Georgia, or Colorado, Homeward can help you leverage your home equity. With the right financial tools in your pocket, getting your dream home is easier than ever.
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