Bridge Financing: Utilizing Home Equity to Purchase Prior to Selling

Buying a new home while selling your old one can be tough. Time and money can feel tight, especially in a hot market. You might think your only choice is to sell, move temporarily, and then search for your dream home. But there's another option: a bridge loan.

A bridge loan is a short-term loan that helps cover the gap between selling your old home and buying a new one. This guide will explain how they work, their pros and cons, and help you decide if a bridge loan is right for you.

How does a bridge loan work?

• Imagine you've found your dream home but are still waiting for your current house to sell. In this common situation, a bridge loan comes in handy. It lets you use the equity in your current home to cover the down payment and closing costs for your new place.

  Usually, the same lender handling your new mortgage will also manage your bridge loan. They'll want your current home to be up for sale and typically offer the bridge loan for six months to a year.

  A key part of this process is looking at your debt-to-income ratio (DTI). This includes your current mortgage payments, the new mortgage for your future home, and any interest-only payments on the bridge loan. However, if your old home has a buyer with a secured loan, the lender might only focus on the payment for your new mortgage.

  This DTI check is crucial for lenders to ensure you can handle payments on both properties, especially if your current home doesn’t sell right away.

What are the benefits of a bridge loan?

• Make a competitive offer on your new home without contingencies.
• Avoid the hassle and cost of temporary housing with just one move.
• Easily prepare your old home for sale, potentially with staging.
• Some lenders offer a grace period with no bridge loan payments.
• Secure your desired properties without waiting for your current home to sell.
  
  

What are the disadvantages of using a bridge loan?

While a bridge loan has benefits, it's crucial to consider its drawbacks:

1. Extra costs such as underwriting and origination fees.
2. Managing multiple mortgages and a bridge loan simultaneously can lead to financial strain.
3. Bridge loans are usually tougher to qualify for than standard mortgage loans.
4. The underwriting process might take longer than anticipated.

Additionally, lenders will evaluate the equity in your current home when deciding how much you can borrow.
If you owe more than 80% of your home's value, getting approved for a bridge loan might be difficult.

When might a bridge loan be a suitable option?

A bridge loan might not suit everyone, but it can be extremely helpful in certain scenarios:

1. When you need the equity from your current home for the down payment on a new one.
2. If avoiding the expenses and hassles of moving twice and temporary housing is important.
3. When you want to swiftly make an offer on your dream home without delays.
4. If a home sale contingency has hindered your ability to buy a new home.
5. When you want to sell an empty or staged home for better appeal and potentially higher profits, especially if you can't stage it while still living there.

What do you need to qualify for a bridge loan?

To qualify for a bridge loan, you need to meet these requirements:

1. Stable income: Lenders check your income to ensure you can handle all payments.
2. Sufficient equity: Typically, you need at least 20% equity in your current home.
3. Good credit: A credit score above 650 is usually necessary for better terms.
4. Listed home: Your current home must be on the market, showing it's likely to sell during the bridge loan period.

Who offers bridge loans?

Not all banks provide bridge loans due to their strict requirements, but you have various options to explore in Miami:

1. Your current mortgage lender
2. Local banks
3. Credit unions
4. Hard-money lenders
5. Non-qualified mortgage (non-QM) lenders

Moreover, some contemporary real estate firms have simplified the process of getting a bridge loan, facilitating the transition between buying and selling homes.