We often have buyers come to us who want to buy a new residence before selling their current residence.
If they do not have enough cash for a down payment, we often just recommend that they get a home equity line of credit (HELOC) against their current home.
HELOCs are awesome because they are usually free and easy to obtain.
HELOCs, however, don’t always work because there is insufficient time to get one or because debt ratios will be too high for the borrowers – once the HELOC is in place.
Hence, sometimes the only option is bridge loan financing.
It is expensive, but it is still a great short-term option for some borrowers. And again – it is sometimes the only option.
Bridge Loans Explained
Our bridge financing option consists of two loans that close at the same time, collateralized by both the current and the new residences.
Loan #1 Against Current/Departing Residence
This is a cash-out loan up to 65% loan-to-value. It will have to pay off the existing mortgage(s), and hopefully provide enough cash for a down payment for the new home.
So – borrowers need a lot of equity in their departing residence for these loans to work.
The rate on this loan is 6.99% currently (could go up) and there is a 2% origination fee.
SO – it is not cheap – but again – the loan is temporary** and there are no payments due for a full year (making this bridge financing overall much easier to qualify for than HELOC scenarios or other bridge loans).
**The loan will be paid off in most cases as soon as the current/departing residence is sold.
These are the terms as of the date of this blog and are subject to change. Changes, however, will not be frequent as this is a portfolio loan.
Loan #2 To Finance Purchase Of New Home
This is a 30-year fixed-rate loan that requires 20% down.
The rate on this loan is about 1/2% higher than current market rates for a “no points” loan.
If a borrower is willing to pay points, however, her rate will be very close to market.
We do not recommend paying points though because we think the better way to go is to refinance the loan in eight months – after the early pay off period ends.
Some borrowers nonetheless insist on paying the points in any case because they are convinced rates will continue to climb – making the points a good investment.
Long story short: Bridge loans are expensive and require a lot of equity.
But because they have no payments for the departing residence loan; because they are temporary; and because they are sometimes the only option for buyers – they can be a great resource.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167