Anyone who has ever purchased their second home, while also trying to sell the first one, has likely come across the conundrum of bad timing. In other words, if you’re a repeat home buyer, try as you might, you simply can’t coordinate the sale of an old home with the purchase of a new one. Every so often, one end of the transaction moves faster or slower than expected, leaving you stuck with owning two homes. That’s where bridge loans step in. Today we’ll explore the bridge loan definition, understand how bridge financing works and also take a look at alternatives to such loans.
So what is a bridge loan anyway?
A bridge loan, also called a wrap loan, or a gap loan, is a temporary loan for the short term that help you finance both the remaining payments on your current home, as well expenses for buying your next home. Once you have completed the sale of your first home, you would have to pay off the bridge loan, then apply for the mortgage loan on your second home. Taking out a bridge loan also means you would have to cover closing costs twice. Though there are no specific minimum FICO ratings or debt-to-income ratios, such loans are difficult to come by and also entail having sufficient equity in the home you are selling. Bridge loan rates also fluctuate wildly, but on average are around 8.5 per cent.
These days, finding bridge loan lenders may prove difficult for individual home buyers. Commercial property buyers and real estate investors may apply for a take out loan, which is a long-term mortgage with a fixed payment that amortize the cost of construction. However, if you’re not an investor, your best bet is to hope your relationship with your mortgage lender is good enough to make you eligible for a small swing loan.
Alternatives to a bridge loan
Sell first, rent it back later
This is an option for sellers who are strapped for money and are more concerned with selling their first home than with finding a second one to buy. In this case, try to sell your first home first and then either opt for temporary housing, or try to negotiate renting your home back from the current owners. This works against the buyers of your first home, though, since it will make it more difficult for them to get a good deal on their mortgage, because of you occupying the home as a tenant.
Find a second mortgage
This option is only available for sellers with enough cash for a down payment and sufficient money to afford paying off two mortgages at once. These conditions are very strict and it may be difficult for you to qualify for a second mortgage, given current lending conditions.
See if you’re eligible for a home equity loan
This only applies for home owners with at least 20 per cent equity in their homes. If eligible, make sure to apply before listing your first home for sale. In order to be eligible, you also need to qualify for making payments on the home equity line of credit or loan.