They say location is everything when it comes to buying or selling real estate — but timing is important, too.
That’s because if you need cash for a down payment for one property before your other sells, you won’t be able to complete the deal. Lenders have found a solution for this, and it’s known as a bridge loan.
A home bridge loan exists as a means to purchase a new property without having to wait to sell your first. It’s a short-term mortgage that allows you to tap into the equity of your home before it sells. These specialized loans are crucial in seller’s markets, where you either show the cash or miss out.
These types of lending tools have their pros and cons, and that’s why progressive lenders are creating bridge loan alternative options that provide the solutions that homeowners need to help them overcome financial obstacles in a stress-free way.
What Is a Bridge Loan?
In a perfect world, you’d be able to sell your home on the same day as you sign the papers for your new home. But if you’re in the market for a new house, you’ll likely discover the process is anything but perfect.
When your closing dates don’t line up, a bridge loan can help. These types of loans literally “bridge” the gap between when you need your equity in your current home and when you’re able to sell it. You can use the money from the bridge solution for closing costs, down payments, or whatever else you need.
Having funding available can make you more attractive to homeowners looking to sell quickly. You also won’t have to include a financing contingency in the contract, if that makes sense for your situation.
Drawbacks to Bridge Loans
Bridge loans require that you repay the entire amount within 12 months or less, depending on the terms set by the lender. This won’t be a problem if you’re able to sell your home. But if unforeseen circumstances happen to make that difficult, you may find yourself in a challenging situation.
There are other drawbacks to bridge loans, too. For example, in order to qualify, you’ll need to have an excellent credit score and the ability to demonstrate a stable source of income. Bridge loans also require 20% equity already in your current real estate investment.
It’s also a fairly expensive lending option. These types of loans have higher interest rates than other loans since they are considered short-term. They also have significantly higher origination fees compared to conventional loans. Sometimes, lenders will charge upwards of 3% of the entire amount.
Before moving forward with a bridge loan, consider your ability to pay in the worst-case scenario. If your current home doesn’t sell, you’ll be responsible for paying for your current mortgage, the mortgage of your new home, and the bridge loan. If you can’t pay, you risk the lender foreclosing on your current home.
A New Alternative: MoveAbility
If you prefer an alternative to a bridge loan, consider a new program by EasyKnock called MoveAbility.
This sale-leaseback program is similar to a bridge loan in that you are able to access the value in your current home before it sells. But instead of shouldering high-interest rates and origination fees, homeowners simply sell their homes, convert their home equity to cash, and continue to live there as a renter instead.
EasyKnock offers the market value of your home, but you can stay in your home for up to 12 months after the transaction. You’re able to start the process by submitting your information online. An EasyKnock representative will schedule a phone call, offer you an estimate for your property, and walk you through the application process.
Next, you’ll sign the purchase agreement, which is necessary before performing due diligence checks and signing the closing documents. That’s when you can convert your equity to the funds to use towards your next home.
You’ll get the time and money you need to find your next home without having to move before you’re ready. You’ll simply be a renter in your current home without any pressure to move. When you’re ready, you can work with a real estate broker of your choice to sell your current home and end your lease.
Best of all, you may be entitled to additional proceeds if your home sells for more than the market value agreed upon originally through the MoveAbility program.
Other Alternatives to Consider
Other bridge loan alternatives include:
Home Equity Line of Credit
This form of a second mortgage offers better interest rates and more time to repay than bridge loans. However, you can’t get a HELOC on properties that are on the market for sale. Terms often include fees for prepayment, which could be costly if your home sells quickly.
If you have savings that can be used for 10% of your down payment on your new home, you can also consider an 80-10-10 loan. You’ll have two mortgages — one for 80% and one for 10%. This process allows you to avoid private mortgage insurance, which can also be expensive.
If you have savings for retirement through a 401(k), it’s possible to tap into it temporarily while you wait for your home to sell. You’ll want to review your plan to see if there are specific restrictions on home purchases and consider the long-term implications of pulling out funds from the market.
Tips for Buying Your Next Home
If you’re looking to purchase a new home while currently owning one, consider these tips:
- Check for errors on your credit score.
- Improve your credit by paying off debts.
- Practice proper budgeting to ensure you can pay off new loans.
- Deep-clean the inside and yard of your home to make it “show-ready.”
- Discuss with a real estate agent the best market price for your current home for a quick sale.
Bridge loans and other alternative financial methods reduce the stress of how to cover the mortgage of a new home before the old one sells. Whichever type of financing you choose, it’s important to talk to a financial advisor and remember to prioritize payments so you make a strong investment for the future of both your finances and your family. Learn more about EasyKnock’s MoveAbility program today.