If you’re considering selling your home and buying a new one, you are probably curious about your financing options. People often find themselves making the first payment on their new home well in advance of when they’ve finished selling their former home.
This creates a major financial squeeze. As a result, many people opt to apply for a bridge loan in order to cover the funding shortfall that occurs when you purchase a new home before you’ve sold the old one.
What Is a Bridge Loan?
Bridge loans are designed to help keep you financially solvent when you have an immediate, short-term, cash flow need. These loans get their name because they act as a “bridge” that keeps you above water while you are waiting for your long-term financing to kick in.
People typically take out bridge loans when they are in the middle of a real estate transaction. The most common time to apply for a bridge loan is when you’ve bought a new home but have not yet been paid for the sale of your former home.
When you take out a bridge loan, you will usually be able to borrow up to 80% of your home’s value. However, it’s a good idea to pay close attention to the specific terms of your loan. Each loan is a little bit different.
Keep reading to learn more about the kinds of rates available on bridge loans, and to find out whether you might qualify for such a loan.
Bridge Loan Rates and Fees
Bridge loans are a great way to keep yourself financially solvent during a transitional time. Keep in mind that they do come at a significant cost.
Bridge loans typically have interest rates of between 8.5 and 10.5% — significantly higher rates than traditional loans.
Bridge loans also tend to come with high “origination” fees. In other words, your lender will integrate a fee of up to 3% just for creating the loan. Moreover, bridge loans usually require that you have substantial equity paid into your current home — 20% is the most common threshold.
Finding a Good Rate on Your Bridge Loan
When you’re applying for a bridge loan, it’s important to do your research. Every lender will offer you slightly different terms.
Most bridge loans are going to carry a fairly high-interest rate, often higher than what you’d pay on a conventional loan. Bridge loans are also short-term, with typical maximum terms from six months up to a year.
Choose a bridge loan that has the lowest interest rate which you can qualify for (the lowest rate on a typical bridge loan is around 8.5%).
Look for a relatively low origination fee and a payment schedule that takes your monthly finances into account.
Qualifying for a Bridge Loan
Lenders will scrutinize your credit score and your finances very closely before they approve you for a bridge loan. They will likely look at your existing debt in order to decide whether you’re a good candidate for a new loan.
If a potential lender decides that your credit score is too low or observes that you already carry a heavy debt load, they may refuse to grant you a bridge loan.
It’s a good idea to check with your lender beforehand to find out about their requirements. Each lender is going to have slightly different guidelines regarding their minimum credit score and debt-to-income ratio, so ask about these before applying.
Is a Bridge Loan Right for You?
Bridge loans are a great option for some people, but they’re not a perfect fit for everyone. Before applying for a bridge loan, it’s important to consider the specifics of your situation.
Do you have good credit and a decent amount of equity paid into your home? Are you prepared to put up your existing home as collateral? Are you willing to pay an origination fee on a short-term loan?
If the answer to all of those questions is “yes,” then you may be a good candidate for a bridge loan. If the answer to any of them is “no,” then you may want to look into some other options.
If you’re serious about getting a bridge loan, it’s a good idea to sit down and calculate whether you’re going to be able to make all of your payments. Remember, you’ll be juggling at least two mortgages if you take on a bridge loan.
Given that your existing property will serve as collateral for the bridge loan, you need to be absolutely certain that you can maintain your payment schedule. Missing payments will have serious repercussions, including having your existing home seized and foreclosed on if you default on your debt.
Bridge Loan Alternatives
For some people, bridge loans are a great way to “bridge the gap” between buying a new home and selling your old one. For others, bridge loans are too expensive and risky to be the right choice. Accordingly, we put together this list of potential alternatives to bridge loans.
Taking Out a Personal Loan
A personal loan allows you to borrow enough money to tide you over while you’re waiting for the sale of your home to go through.
You can apply for a personal loan at a bank or any other financial institution or lender. Most of the time, personal loans will come with a fixed interest rate. You can also likely qualify for a longer-term than you’d get on a bridge loan.
However, qualifying for a personal loan isn’t always easy. You’ll need to have a minimum credit score and be able to show that you can reliably make the payments. Depending on the terms, you may have to put up collateral in order to qualify for the personal loan.
Taking Out a Home Equity Line of Credit
A home equity line of credit, or HELOC, allows you to borrow money directly against the equity that’s already in your home. This can be a great option if you have plenty of home equity already. HELOCs usually come with a lower interest rate than the typical bridge loan.
The downside to taking out a HELOC is that some lenders don’t like to grant them if your house is already on the market. Be sure to check with your lender to see whether a HELOC is a realistic possibility for you.
A sale-leaseback program is an excellent alternative for homeowners who want to convert the existing equity in their homes to cash without having to move out or take out a loan.
If you’re trying to figure out if a bridge loan is the best option for you, be sure to do your research and talk to a financial advisor. You may find that an alternative solution may even be better for your needs.