A bridge loan may help your buyer fund their next home before completing the sale of their current home. Essentially, it’s a way to take out a loan against their current home to make a down payment on a new home. This temporary loan is helping some buyers be able to waive a contingency for the sale of a home in a bidding war for a home and help their offer stand out more to the seller.
After all, some sellers who are juggling many offers for their home may be more likely to bypass offers that are contingent on the sale of a current house.
Bridge loans can differ in structure among lenders. Usually, a homeowner can use a portion of their bridge loan to pay off their current mortgage while using the rest as a down payment on a new home. Homeowners also may be able to use a bridge loan as a second mortgage to cover the down payment for their new house. The underwriting on bridge loans tends to be faster than traditional loans, financial experts note.
While bridge loans offer buyers a chance to make a contingency-free offer on a new home without selling their existing home, there are some caveats to consider. A bridge loan tends to have higher interest rates (HousingWire reports between 8.5% to 10.5%) and these loans only last between six months to a year. Also, the borrower will have to pay back the loan even if the home doesn’t sell during that time.
Source: “What Is a Bridge Loan?” HousingWire (March 25, 2021) and “Is a Bridge Loan Right For You?” Forbes.com (Aug. 12, 2020)
