If you are purchasing a new home, but can’t afford to carry two mortgages as you sell your existing property, bridge loans could provide the perfect solution.
Bridge Loans: Spanning the Financial Gap from Old Home to New
Sometimes called a “wrap loan” or “gap financing,” these loans help you span the distance between one home and another. Used by current homeowners who are buying a new property, these loans reduce or entirely eliminate the temporary financial burden created by having two mortgages at once.
When someone is moving into a new property, they are often going from one mortgage to another. For obvious reasons, they usually choose to first find and purchase a new home, then sell their old property. But this creates a period of time, which can last weeks, months, but in some cases years, when the homeowner has two mortgage payments.
Some lenders are reluctant to issue loans to people who are purchasing a new home. They know that even if the borrower is an excellent candidate for a loan, the short gap between buying a house and selling the old property creates significant risk.
A bridge loan helps span this gap. Essentially, you get a loan that is near the sum of both properties (usually about 80%), which allows you to pay off the old mortgage and maintain just a single payment. Once your home sells, you pay off the bridge loan and apply for a new long-term mortgage with the new property listed on the documents. You basically go from the bridge loan into a new traditional loan.
Who Should Consider Using these Loans?
Bridge loans can be useful for many different borrowers. That said, they are particularly effective for homeowners who are in a few situations. First of all, you need to be a current homeowner who is purchasing a new home; if you are a first-time buyer or don’t currently own your home, these loans are not needed.
If, for whatever reason, you are unable to sell your house before closing, you may want to consider a bridge loan. Many homes, especially in the current market of red-hot, rapid sales, are sold well before the new home is finalized. But it’s still possible to have long wait times for selling your property.
They are also useful for people who simply can’t qualify for two loans. Many borrowers simply can’t afford the double payment, and even if they find a lender who will allow for multiple mortgages at once, it can create a significant financial stretch. For this reason, it may be best to avoid dual mortgages, whether you can qualify or not.
People on a strict moving deadline will also find these loans helpful. If you have to move fast, and don’t have time to start the listing process on your current property, a bridge loan can likely help.
Requirements for Using Bridge Loans
Using these loans requires borrowers to meet a certain set of credit, finance, and debt-load standards. These requirements are not highly restrictive, and many borrowers will discover they are eligible.
Letter of Intent
One of the most unique requirements for these loans is that you need to provide a letter of intent. Bridge loans are dependent on you selling your current property, so you’ll need to verify, in writing, that you will start selling the current residence within 90 days.
20% Equity in Current Home
Bridge loans also have equity requirements. For these loans, you’ll have to have 20% equity in your current property. So if you have a property valued at exactly $500,000, you’ll need at least $100,000 in equity before you can qualify for this financing. If you have been in the property for a few years and made the purchase with a strong downpayment, there’s a good chance you have already reached 20% equity.
Credit Scores of 680 or Higher
This loan product has a credit requirement of 680. This is not considered a particularly high score, but neither is it a low score. According to Experian, one of the major credit bureaus, 680 would be considered “good.” But it’s not “very good” and it’s not “exceptional.” The point is that for these loans, you need strong credit but you don’t need a massive score.
Debt-to-Income Ratio No Higher Than 50%
To use these loans, your total debt load cannot be higher than 50% of your total income. For example, if you earn $10,000 a month, you cannot have more that $5,000 in monthly debt payments. Remember, DTI ratio only pertains to your monthly payments and has nothing to do with your total debt load. (Conceivably, if two people have monthly payments $2,000, but one owes a total of $40,000 while the other owes a total of $80,000, they would be treated the same, at least for DTI.)
At Least Six, Possibly 12 Months of Reserves
If the property you are selling (your old residence) has a sales contract in escrow that is within 60 days, you will only need six months of reserves. However, if the property does not have a sales contract, you will need at least a year of financial reserves.
Finally, you’ll need to bring a downpayment of at least 20% to use these bridge loans. This is a fairly typical requirement for loans of this type.
Other Features and Details for These Bridge Loans
Our program can deliver a high level of financing. If you qualify, these bridge loans are available for up to $2.5 million in financing, and they come in 30-year fixed-rate mortgages. Interest-only loans are also available, which allows you to use the sale of the old property to lower the minimum payment.
Another benefit is that you can use cash gifts to fund 100% of the downpayment, and you can use assets and savings as income to qualify. Best of all, when using assets there is no age requirement.
Get an Affordable Bridge Loan for Your Next Purchase
Affordable rates are available. Contact our staff today to learn more about bridge loans. These important loans can help you get through the difficult stretch between purchasing a home and selling your old property, so let us help with your qualification today!