Lately, I have received more inquires about bridge loans. Bridge loans are used when someone wants to make an offer on their next home non-contingent on the sale of their current residence BUT they need the equity from their property for part of the down payment on their new home.
Bridge loans can be a great tool in a hot market where sellers are in the position to be extra picky, when multiple offers are a possibility or perhaps the seller is simply not in a position to accept an offer contingent on your property selling. A buyer wants to put forth the best offer if they really want the property for their next home. With a bridge loan, there are no monthly mortgage payments and the interest that accrues is paid off at the closing of the buyer’s listed home.
Mortgage and some real estate companies offer bridge loans, as does our mortgage company. The guidelines and terms may vary from company to company so if you are considering a bridge loan, please make sure your Mortgage Planner clearly explains the terms to you. The terms that I am discussing in this post are those of Mortgage Master (with that said, our company may make exceptions as well).
Bridge loans lend a portion of the equity of the property that is listed with a real estate agent. For example, if you have a home listed for $400,000 with a $200,000 mortgage balance, we would lend up to $120,000 (400,000 x 80% less the mortgage of 200,000). The $120,000 would be used for down payment on the next home. Different lenders have different ways of factoring how much they will lend for a bridge loan.
With a bridge loan, a deed of trust would be recorded against the current residence listed for sale. The $120,000 bridge loan plus interest would be paid off once the property is sold along with the current mortgage in the amount of $200,000.
A home buyer considering a bridge loan should discuss this with their Mortgage Planner and Real Estate Agent. The buyer will need to be approved factoring in mortgage payments for their current residence, the new home AND the bridge loan (interest only payments, even though no payments are due).
A possible down side to a bridge loan is if the home buyer’s property that is listed does not sale right away or if they have a sale that fails for what ever reason. It is quite possible a buyer could be stuck with 2 mortgage payments. There is usually a gap of one month before the payment on the new home is due. However, it also takes time for closing to take place once an offer is made on the buyer’s former property.
Bridge loans are intended to be short term financing (6 months). If you are considering a bridge loan, you may want to discuss market conditions with your real estate agent and make sure that your listing is "priced to sell" so you’re not in a position to become strapped with two mortgage payments for too long.
Update: Due to market conditions, Mortgage Master is not offering bridge loans.