You’ve just found your dream home, complete with beautiful wood floors, spacious bedrooms, and a huge backyard. Your agent says you need to act fast. There’s only one problem. You still own your current home. When a home buyer is purchasing another house before selling their existing one, they would usually make their offer contingent on selling their current home. But in today’s slower real estate market, that can take months. Here’s where a “bridge” loan comes in handy.
What is a bridge loan, and how can you benefit?
Bridge loans help make it affordable to span the gap between the time you buy a new home and sell your current home. There are several types of bridge loans.
- Separate Bridge Loan: Borrow the money to pay off your existing mortgage and enough to make the desired down payment on your new home. You’ll make your monthly mortgage payment on your new home, and when your old home sells, you use the proceeds to pay back the bridge loan. Many lenders will charge more for a separate bridge loan, sometimes as much as two percent more than an average 30-year fixed rate mortgage, because they view it as a temporary loan. This option increases your payments and/or obligations to additional lenders who may place a lien your current home
- Leverage Your Equity: Keep your mortgage but borrow against the equity in your current home, and use that money as the down payment on your new home. This type of loan requires that you have sufficient income to qualify for the mortgage payments on both your current home and your new home. Also, will increase the payment and obligation to your lender(s) on your current home.
- Leverage Your Equity with Combined Financing: Use a single loan to cover what you need to borrow to buy your new home. The equity you have in your current home is leveraged to cover the down payment requirement on your new purchase (the lender’s loan-to-value limits). When your existing home sells, you pay down the balance of the loan and end up with a regular 30-year fixed rate mortgage. Your lender will usually reamortize your loan, which means they recalculate your monthly payment based on your newly reduced principal balance. This option does not change your payment or obligation with the lender on your current home.
At Washington Federal, we offer this third type of bridge loan, also called a Cross-Collateral Loan. It allows you to borrow against the value of your new home based on how much equity you have in your present home. You can secure a fixed-rate loan to cover the down payment on your new purchase without changing the payment or obligation to your current lender. Being able to leverage the equity in your current home in this way means you can make an offer on the new home without contingencies.
We understand that most of us don’t have the income to qualify for two mortgage payments long term. That’s why we’ll take a look at your financial situation and may be able to exclude your current house payment when evaluating your loan application. We want to make sure you clearly have the ability to handle the temporarily high payment obligation until your current home sells.
Bridge loans can also be used to finance the construction of a custom home, allowing you to live in your current home while your new home is being built.
If you have found a home that you’ve fallen in love with, but haven’t sold your existing home, come talk with us. The options can be complex, so will walk you through every step of the process and help you find the best solution for you.