After discovering the home you wish to buy, you might be thinking about your financing options. Other than fixed-rate and adjustable mortgage loans, there is another type of mortgage known as bridge mortgage. Bridge loans come in to meet the need during the demand for cash and its availability. They are prevalent in real estate transactions.
A bridge mortgage solves the financial problem when you are stuck between purchasing a new home before your current one sells. It bridges the gap while selling and buying a home simultaneously. Here are the critical things to know about bridge mortgages.
How a bridge loan works
There are several mortgage options when it comes to bridge loans. These are the two primary cases in which a bridge loan can meet a borrower’s needs.
- Hold two loans- in such a case, the lender offers you the difference between your current mortgage balance and up to 80% of your home’s value. The funds you obtain from this second mortgage go to the down payment of your second home, allowing you to keep your initial mortgage intact until you can pay it all off when you sell your existing home.
- Merge both mortgages into one- in this case, you can borrow one huge loan for up to 80% of your home’s value. So, you complete the payment of your initial mortgage and then apply the second mortgage towards the down payment of your second home.
How beneficial is a bridge mortgage?
The most sensible reason to borrow a bridge loan is to allow you to put in a contingency-free offer on a new house. That means you can buy a new house as you wait to sell your existing one. That means you are not relying on the house selling to complete the transaction. It is an alternative mortgage that allows you to use your current home’s equity for the down payment of purchasing a new home.
How to get a bridge loan
Obtaining a bridge loan is not similar to getting other types of mortgages. Some lenders require a high credit score, an acceptable debt to income ratio, and tax returns. However, not all of them need that information to give you a bridge loan. Some private mortgage lenders assume that you are already eligible for a bridge mortgage since you qualify for a mortgage.
You must qualify to own two homes to qualify for a bridge mortgage
A lender may decide to give you the loan depending on whether it makes financial sense to get the bridge loan. If you don’t prove that you can pay a second mortgage and a bridge mortgage, you may not qualify for the loan.
Fees attached to bridge loans
Bridge mortgages have fees that vary depending on the lender, your risk, and your location. But overall, a bridge loan has more expenses than a standard loan. It is a temporary loan with high interest if you fail to sell the home within a short time and includes other costs such as title, administration, and the appraisal fee.
the takeaway
Ensure you can sell your home before borrowing a bridge loan if you don’t want to be stuck with two mortgages plus a bridge loan. That could mean selling your initial home for less than you want due to the financial situation.