Buying and moving into a new home is one of life’s great experiences, especially if you’re buying your first home. From getting that pre-approval to the “yes!” response on an offer to closing and moving in, every step is exciting. And while the process is engaging and fun, it’s important to prepare for moving day […]
Is a bridge loan the right option for you?
It’s no secret that the housing market is still red-hot. For example, homes in the St. Louis area sold on average in seven days during the summer of 2022. This summer the average time on-market before sale is eight days.
And while the average time to sell a house in the St. Louis market is currently approximately one week, an inordinate number of homes sell in their first or second day listed, often significantly over their listed price.
But not every home flies off the market in a day or two. Homes in rural locations, extremely large houses, houses that have no basements, and others located off busy streets or highways are just a few of the types of homes that owners know won’t sell quickly.
Timing is the challenge
In a normal housing market, a comparatively slow selling home isn’t much of a problem. But in the current hot market, buyers compete almost viciously to win the house, condo, duplex or townhome they are hotly pursuing. This means sellers are accepting not only the highest offer, but in many cases, the offer that is the least likely to fall through and the most likely to be completed as quickly as possible.
So, buyers who are shopping but haven’t sold their current home can be at a distinct competitive disadvantage. After all, it’s not easy to buy a new home when you haven’t sold your current residence. And the pressure only mounts if you want to buy a new home before the start of a school year, or if you’ve found your dream home and fear it will be sold before you can sell your current home.
A bridge loan may be an option
Homeowners who are in this position have an option they may not have considered. A bridge loan (also referred to as a “bridging loan” or “bridging financing”). These loans combine a homeowner’s current mortgage with financing to cover the purchase of a new home.
Bridge loans are in most cases, short-term financing options that enable qualified borrowers (more on that in a moment) to make a home purchase that would have been difficult or impossible through a conventional financing approach, particularly in a housing market that is anything but conventional.
How do bridge loans work?
Borrowers turning to a bridge loan use the equity in their current home for the down payment on the purchase of their new home while they continue to sell their current home. Bridge loans give the homeowner the flexibility to purchase the home of their dreams or to buy on their own schedule.
Bridge loans are viewed by lenders as a short-term financing arrangement and are not readily available to all borrowers.
What are the qualifications for a bridge loan?
While bridge loans offer borrowers exceptional flexibility and the ability to make a home purchase that would normally not be possible, they aren’t available to all borrowers.
In most cases, lenders restrict bridge loans to borrowers who have:
- Extremely high, even perfect credit
- Significant equity in their current residence
- A comparatively low percentage of their income dedicated to their current mortgage
- An exceptionally low debt to income ratio
- Enough cash on hand to complete the purchase with a loan of less than 20% of the combined values of the home to be sold and the home to be purchased
In addition, bridge loans often come with higher interest rates than conventional mortgages, higher fees, and a short term. Still, for the right borrower in the right situation, a bridge loan can be a convenient and effective option.
Talk to an experienced loan officer if you are considering a bridge loan
The loan officers at SmartMortgage have experience in supporting countless buyers seeking conventional and innovative financing for homes. Regardless of your situation, our loan officers will support you from application to closing and are ready to help you. Contact us today and get the professional advice and service you need