So you've found your dream home and want to write an offer or maybe you are just thinking about moving. Either way, if you are like many homeowners, you can't buy without selling. You've heard about this crazy real estate market and how hard it is to buy a home due to all the competition. The idea of selling your home first and possibly being stuck without a place to live seems like a logistical nightmare. What can you do? This is where a bridge loan or a HELOC comes in handy. Most people tend to use HELOC's but they do have limitations. Today we are going to talk bridge loans.
What is a bridge loan, and how can you benefit?
Bridge loans help make it affordable to financially span the time between when you buy a new home and when you sell your current home. There are several types of bridge loans, the first two in the list below are the most common and the third is a new product offered by one of our lending partners.
Leverage Your Equity: You borrow against the equity in your current home and use that money as the down payment on your new home. This type of loan requires that you have sufficient income to qualify for the mortgage payments on both your current home and your new home. The bridge loan allows interest to be deferred to the balance of the loan (so the balance grows monthly based on simple interest) but your lender will still calculate the payment into the qualifying ratios.
Leverage Your Equity with Combined Financing: Similar to the first type but in this case you use a single loan to cover what you need to borrow to buy your new home. The equity you have in your current home is leveraged to cover the down payment requirement on your new purchase (the lender’s loan-to-value limits). When your existing home sells, you pay down the balance of the loan and end up with a regular 30-year fixed rate mortgage. Your lender will usually re-amortize your loan, which means they recalculate your monthly payment based on your newly reduced principal balance. This option does not change your payment or obligation with the lender on your current home.
But wait there is more....
Cross Collateral Bridge Loan* : This is a third type of bridge loan. It allows you to borrow against the value of your new home based on how much equity you have in your present home. You can secure a fixed-rate loan to cover the down payment on your new purchase without changing the payment or obligation to your current lender. Being able to leverage the equity in your current home in this way means you can make an offer on the new home without contingencies.
Most people don’t have the income to qualify for two mortgage payments long term. That’s why your lender will take a look at your financial situation and may be able to exclude your current house payment when evaluating your loan application. They will want to make sure you clearly have the ability to handle the temporarily high payment obligation until your current home sells. If you qualify, this option can work out really well – especially in the current real estate environment. It is a quick and easy calculation to determine if this option will work for your circumstances.
Bridge loans can also be used to finance the construction of a custom home, allowing you to live in your current home while your new home is being built.
If you are considering a move to a new home and don't want to sell the one you have until you have found the new one, consider some of these financing options. They can be complex, but with the help of our lending partners we can help you find the best solution for you and make your home transition as painless as possible.
The above loan information was provided by Sheila Bryan at Caliber Home Loans. Sheila.firstname.lastname@example.org 425-605-3110, MLO-175890