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Every now and then, an opportunity arises you know you need to jump on. Sometimes that opportunity is to buy your dream home even though your current home hasn’t sold yet. In other cases, you may need to relocate for a job and don’t have time to sell your home before purchasing in a new city. While this situation can be tricky to navigate it isn’t impossible.

So … How does a homeowner buy a new home while still paying for their current home?

Enter: the bridge loan.

A bridge loan is sometimes called a gap loan because it fills in the "gaps." A bridge loan acts as a short-term financing until the original home is sold, allowing a home buyer to take on a conventional home loan.

 

Qualifications for bridge loans:

  • You need to have at least 20% equity in your home built up to be eligible for a bridge loan.
  • Credit score requirements are higher, usually a minimum of 700 is necessary to be considered.
  • Low debt-to-income ratios are also a requirement to qualify for gap financing.
  • Most bridge loans are designed to be paid back within six to 12 months.
  • The loan cannot be for more than 80% of the value of your current home.
  • In most cases, your new mortgage will need to be financed by the same company that gives you the bridge loan.

(*Qualifications may vary based on lender.)

What are the pros to using a bridge loan?

A bridge loan can have a faster application process compared to traditional home loans. You may also be able to waive contingencies which can look good to home sellers and close faster, since your offer won’t be based on your current home selling. The biggest benefit is you can purchase your new home without selling your current home first.

What are the cons to using a bridge loan?

Interim financing can be expensive. Unfortunately, there’s no way around that. Interest rates tend to be much higher due to loans being short term. In addition, the requirements are stricter when it comes to bridge loans, which may make them harder to obtain. Many lenders will also charge higher fees on these loans.

Bridge loans also need to be paid by a specific date, regardless of when your original home sells. So, if your current home doesn’t sell within the timeline of the bridge loan, you will not only have to payback the loan while making mortgage payments on both homes, but you will be responsible for the expenses of both homes as well. This will include homeowner’s insurance and property taxes, as well as bills such as water and electric.

How to pay off a bridge loan:

When it comes to paying off your bridge loan, the payment plan will depend on the lender you work with. The most common situation is you use the bridge loan to put a down payment on your new home and when your current home sells, you take the lump sum and pay off the bridge loan with it.

Are there better options than taking out a bridge loan?

As we stated earlier, bridge loans come with higher risk. Even if you have a higher amount of cash savings or equity in the home you’re selling, the costs of a short-term loan may not be worth it.

While everyone’s situation is unique, the first step before taking out any loan is the same: Make sure you’re in control of your finances. Sit down and look at how much money is coming in and going out each month, so you have a clear understanding of your financial state. Once you know what you can afford, it’s time to get in touch with a Home Loan Specialist and see what your options are.

Buying your home is a huge investment that can lead to building wealth. By taking this step, you’re setting yourself up for a brighter financial future. That’s why our team at Churchill Mortgage focuses on doing what’s right for you. We make sure your financial situation and home loan options lead to a path of debt-free homeownership.

If you’re looking to buy or refinance, or just have questions, reach out!

Connect with a Mortgage Expert!

 
 
 
 
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