Bridge mortgages are an aptly named solution to a specific situation: You make an acceptable offer on a new home, but your current house hasn't yet sold. You don't have the cash proceeds from selling your present home to bring to the upcoming closing to buy the new property. Your mortgage lender agrees to give you a bridge loan to generate the cash you need -- short-term -- to complete your new purchase.
Who Offers Bridge Loans
If you are getting your purchase money mortgage from a bank or credit union, often that lender will make a bridge loan to give you the cash you need while awaiting a qualified buyer for your current home. Should you have an approval from a mortgage company, you may be able to get a bridge loan from the company. Since mortgage companies don't accept deposits, they must use their line of credit from a discount lender to have the cash it takes to make bridge loans. Some may not be able to offer short-term bridge loans.
How Bridge Loans Work
Assume you hope to get $250,000 from a buyer of your current home. Your present mortgage balance is $110,000, leaving you with equity of $140,000. The home you've agreed to purchase costs $275,000. You've been approved for a $150,000 new mortgage. You, therefore, need $125,000 in cash to complete the deal. Your mortgage lender agrees to give you the cash as a bridge loan -- recording a second mortgage lien on your current home. You then have the cash you need to close on your new home; you will pay off your bridge loan when you find a qualified buyer and close on your present home.
Bridge Loan Risks
You and your lender face some risks with bridge loans. First, the real estate market could "crash" before you sell your present home, driving down your property's value. You must sell your current home for, at least, enough to pay off your bridge loan. Second, you'll need to make not one, not two, but three mortgage payments each month that your present home doesn't sell. Some lenders may allow you to make no payments on your bridge loan for a short while, keeping you out of cash-flow trouble. But, should it be months before you find a buyer, your mortgage lender will grow impatient and may require monthly payments if your loan note so provides.
Bridge Loan Qualification Issues
SSince bridge loans usually are made by lenders with the ability to keep loans in their portfolio, i.e., banks and credit unions, they set their own qualification procedures. However, most will require that you have good cash flow, job stability, excellent credit, significant equity in your present home, and that your selling price is reasonable in the current real estate market conditions. You might need to pay for an appraisal on your present home to help ensure your bridge lender that your property justifies your selling price.
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