Is a bridge loan right for you? This article will explain what they are and when they can be effective.
In past real estate markets, it was no problem to sell your home first, then, before the new owner moves in, purchase the house of your choosing. At most times there was plenty of inventory, limited competition, and a buying atmosphere that allowed you to move from one property to another with little stress.
In today’s market, things are different. Because of low inventory (among other reasons), finding a home to purchase can take time; nothing is guaranteed, and most quality homes, at least the ones priced reasonably, are taken off the market almost instantly.
This has caused most homeowners to buy first and sell later. They go out and find the home they want to purchase before selling. They buy first because they don’t want to risk being without a property.
While a good strategy in today’s market, this creates a problem: between purchasing a new home and selling the old, most homeowners are stuck with two mortgages. This creates massive stress on their finances, and could even cause lenders to avoid their purchase altogether.
Fortunately, a bridge loan can be used to solve this issue.
How to Use our Signature Bridge Loans to Buy Now, Sell Later
Also known as “gap financing,” a bridge loan helps homeowners get through the period between purchasing a new property and selling the old. Essentially, it is a short-term financing option that “bridges” the gap.
With a bridge loan, you are able to borrow an amount needed for a downpayment on a new home. Basically you take the equity that is built into your current home and transfer it into a downpayment for a new property. This allows you to make the purchase without have to sell your home in order to afford a new property.
Usually these loans last about six months to a year. Generally the lender will give you this time to sell your existing property. Once you sell the property, you will basically refinance out of the bridge loan and have a new loan.
Advantages of a Bridge Loan
There are a few advantages to using a bridge loan, but it all comes down to the fact that you can purchase a new home without the financial (and mental) stress of having two mortgages. Until the new home is purchased, you are simply making payments on the old property, as well as smaller payments on the bridge loan or (in some cases) the bridge loan will be completely deferred until the new home is purchased.
Not only can a bridge loan ease your stress and financial strain, it can also make you a more competitive buyer. This is because you remove any sale contingencies from your purchase offer. When you make an offer to purchase a home, the offer may come with contingencies; basically things that need to be done in order for the purchase to be complete. One of those contingencies, and often the largest, is the sale of the existing home. With a bridge loan, you can make the purchase without a sale contingency. Sellers prefer purchase offers with as few contingencies as possible, so one that has no sale clause can be extremely attractive, and may boost your offer to the top of the list, even if it’s slightly lower than others.
When to Use Bridge Loans
A bridge loan can be useful in a variety of situations. However, there are some unique circumstances when a bridge loan is particularly beneficial.
The most notable situation is when you are buying and selling in a fast-paced, highly-competitive market. If homes are selling fast, and hundreds of buyers are clamoring for just a few for-sale houses, it can be tough to sell first, purchase second. You could be stuck with no ownership, forcing you to rent, or even live with a friend or family member, until you find a home. This is not an attractive option to most homeowners. So if you live in a market where properties are selling fast and buyers are having trouble making a purchase, this could be the perfect choice.
It’s also useful if holding two mortgages, even for a short period, would create a strain on your finances. Mortgages can cost thousands of dollars a month, and the new home could (possibly) bring an even higher mortgage payment than your current home. If there is little wiggle room in your monthly budget, a bridge loan can be useful.
They also help when you can’t afford a downpayment without selling your new home. Many people have significant equity in their homes but little savings in their bank accounts. Although there are tens or even hundreds of thousands of dollars in savings locked into the home, this money is inaccessible. (Which, of course, can be both good and bad.) A bridge loan allows you to access this equity and use it towards a downpayment, a significant advantage if you don’t have the cash available.
Jumbo Loans Available
These loans are not just for moderate homes and mid-priced properties. If you are a high-end buyer, one that needs a home loan well beyond the conforming loan limits, there are jumbo bridge loans available.
These loan allow buyers of larger, luxurious houses to have the same advantages that other buyers experience when using bridge loans.
In fact, these loans are not as uncommon as you might think. They are not just for fantastically wealthy buyers, but are often required by homebuyers in the upper-middle range of the market. Take our city of San Diego as an example. In San Diego County, the limit for conforming loans on a single-family property is $879,750. This limit can be used for many excellent homes, but there are numerous properties, far from opulent mansions, that are priced well beyond this amount. A jumbo bridge loan could be used in these situations to buy a comfortable home.
Get the Service You Deserve for Your Next Mortgage
If you want to learn more about jumbo bridge loans, contact our team today. We’ll show you the details for this handy option so you can seamlessly transition from one property to another, all without creating a financial burden.