Real estate shoppers who’re struggling to buy a home due to the intense competition in the market might want to consider using a bridge loan to give themselves an edge.
A bridge loan enables buyers to fund their next home purchase before they sell their current home. It enables them to waive the sale of their own home contingency when they make an offer on a new property. That should help their offer to stand out from others during a bidding war.
Essentially, a bridge loan is a loan taken out on the existing home, that can then be used to make a down payment and fund the purchase of the new home. They are very often temporary loans that can be paid off once their current home has been sold.
Experts say that an offer that is not contingent on the sale of the current home is far more likely to be accepted than bids that are.
“There’s no denying a bridge loan can be convenient if you’re ready for a change but don’t want to risk a contingent offer,” said Jordan White in HousingWire. “A bridge loan can also be a good way to finance a new house, in the event you have to relocate for a job.”
Consumers need to be aware that bridge loans can differ in structure, depending on the lender. In most cases, the homeowner can use a portion of the bridge loan to pay off their existing mortgage, and then use the rest as a down payment on the new home. Other lenders allow the bridge loan to be used as a second mortgage that also covers the down payment on the new home. Another advantage is that the underwriting process tends to be faster with bridge loans than traditional financing.
However, there are some downsides. The most important consideration is that bridge loans tend to come with higher interest rates, typically between 8.5% and 10.5%, according to HousingWire. Moreover, the term of a bridge loan is usually only between six months and one year, so borrowers will have to pay back the loan within that time frame, whether or not they manage to sell their own home.
“Paying two mortgages, and making payments on your bridge loan can be stressful, especially if your existing home doesn’t sell as fast as you’d hoped,” White said.