Buying a new home while selling your current one is quite challenging. It’s a financial balancing act that can be hard to handle. If you’re in this situation, you might consider a bridge loan. This provides temporary financing for your new home while allowing you to use your current home’s equity to make the purchase successfully.
One thing to remember is that bridge loans have their own benefits and risks that you need to be aware of. Once you understand how they work including the bridge loan pros and cons, you can decide if they can be best suited for you.
What Is A Bridge Loan?
A bridge loan is defined as a short-term loan that “bridges” the gap between purchasing a new home and selling the current one (hence the name). You can get immediate cash flow that will allow you to purchase the home, making it easier for you to move in as soon as possible while your existing property is still on the market. The loan is supported by the selling home’s equity and gets repaid once the sale goes through.
When Can Homebuyers Use Bridge Loans?
Bridge loans can help you buy a new home before selling the current one as soon as possible. In a competitive market where homes are listed on the market and are taken off soon after a sale, strong offers are a major plus (especially if a seller expects one fairly quickly). As such, there are times where a homebuyer can utilize the bridge loan such as:
- Making a down payment for the new home
- Avoid contingent offers
- Compete with buyers who are all-cash
- Cover the closing costs
Simply put, these bridge loans for homebuyers will provide you with speed and flexibility allowing you to secure the deal you want. Even better, you don’t need to wait until the existing home is sold. Buy the house you desire, move in, and then continue on with the process of selling the old home until a sale is complete (which may take time and even the right offer).
How Do Bridge Loans Work?
A bridge loan is a short-term loan that can last anywhere from 6 to 12 months. Since they are mostly interest-only loans, you’ll only pay the interest of the borrowed amount during the term. When the old home sells, you can use the proceeds to pay off the rest of the loan. Let’s take a look at the following example:
- Let’s say your current home is valued at $500,000. You have a mortgage of $250,000.
- You have $250,000 in equity.
- You have a bridge loan that allows you access to $150,000 of that equity, used for a downpayment for the new home.
- After your old home sells, you can use the proceeds to pay off the amount of the bridge loan.
If you have additional questions on bridge loans and how they work, our advisors at Penn Street Mortgage will be happy to answer them, even if you are looking for a mortgage lender that can assist you in the long run. They can also advise you on whether or not they can be the best fit for your situation. For additional information to help you through the process, you can use this mortgage calculator to get additional numbers based on the purchase price, home insurance, property taxes you pay, and more.
What Are The Pros and Cons of Bridge Loans?
Knowing the bridge loan pros and cons can help you make a smart decision on whether or not it can help with your home-buying situation. Let’s take a look now at the following:
Pros of Bridge Loans:
- You can buy a new home before selling the old one, allowing you not to miss out on your dream home.
- Stronger offers so you can avoid sales contingencies that may otherwise weaken your bidding position against competing buyers.
- Quick access to equity from your current home’s value.
Cons of Bridge Loans:
- The repayment window is much shorter compared to other loans
- Higher interest rates than traditional mortgages
- Your home may go unsold for a long period of time. Meaning you may be stuck with two mortgages instead of one if you are unable to sell the home within the time period of the loan.
Remember that every buyer has a unique situation. If you are wondering if a bridge loan is a good option, working with bridge loan lenders for Chester County homebuyers is your next step. At Penn Street Mortgage, we can help you navigate through the process from start to finish.
Who Is A Good Fit For A Bridge Loan?
Bridge loans may be a good fit for numerous types of homebuyers. It may be a good option for you in such ideal situations like:
- Buyers in real estate markets that are competitive
- Those who are able to handle two housing payments on a temporary basis
- Homeowners with significant equity
- Buyers who wish to avoid contingent offers
Finding bridge loans near you doesn’t have to be a challenge. If you are in Chester County or nearby areas, Penn Street Mortgage can be the bridge loan experts who will assist you with the whole process. We have worked with homebuyers who want to move on with purchasing the home of their dreams while also in the process of selling the old one quickly.
What Are The Qualifications For A Bridge Loan
If you intend to apply, bridge loan lenders have requirements that you’ll want to follow. In order to prepare for the application process, you’ll want to pay attention to the following qualifications that are typical for such lenders:
- Good credit score (usually 680 or higher)
- Proof of income that confirms you can cover both mortgage payments
- Significant equity in your current home (minimum 20 percent or more)
In addition, lenders can request a listing agreement or a signed purchase offer that confirms that you plan on selling your current home. It’s important to include documentation that allows you to fulfill the necessary requirements for bridge loans. Penn Street Mortgage can discuss any recommendations that are fit for your situation, if necessary.
Contact Penn Street Mortgage About Bridge Loans Today
Bridge loans can certainly allow you to move forward with purchasing a new home. However, the process of selling the old one can be stressful. You don’t need to wait until the old home sells before buying a new one. Penn Street Mortgage can help you with bridge loans if and when it’s necessary for you. Contact them today if you have any questions or to schedule a consultation.