Ask Renee: Bridge Loans and How they are used

Good morning, this is Renee Hahn from Downing Fry Realty. This is part of a series I call Ask Renee, where I tackle some of the more common questions that come up in the area of real estate and provide some answers. So today what I want to talk about is bridge loans. Bridge loans, I'm starting to find, are becoming popular again, and so the big question that gets asked is, what is a bridge loan and how does it work? So let me talk a little bit about— bridge loans are temporary loans that bridge the gap between the sales price of a new home and a homebuyer's new mortgage in the event that the home hasn't yet sold. So the bridge loan is essentially secured against a buyer's existing home, and the funds from that bridge loan are then used to put a down payment on on a new home. Now, that money available from the existing home is based on the equity in the home. So let's just briefly talk about what are some of the benefits and drawbacks. On the benefits side, um, the buyer can immediately put their home on the market and may buy without restrictions. So they decide to list their home, they can start shopping for another home right away and use the bridge loan as a way to come up with a reasonable down payment. The bridge loans also may not require monthly payments payments for a few months. In fact, I, I heard, I think it was Third Federal, is actually offering 12 months without payments while you're trying to sell the home. Now, that's obviously while the existing home is on the market. The main advantage of the bridge loan, however, is to avoid having to make contingent offers. So in hot markets, places like Naples where a lot of buyers come with cash, an offer with a contingency to sell an existing home may not be as attractive as others. And so being able to use the bridge loan as a way to come up with a down payment while your home is still on the market may allow you to make an offer without a contingency. Some of the drawbacks, however, um, bridge loans typically cost more than home equity loans, which is another vehicle that sometimes gets used to come up with a down payment. However, keep in mind that most lenders will not lend on a home equity loan if the home is on the market. Another drawback is buyers will be qualified by the lender to own two homes And because of that, the criteria can be pretty stringent, and so people may not qualify. The third drawback, I just say, is just the stress that comes from, you know, being responsible for two mortgages at one time and the accruing interest— excuse me— that come from that. So as with any of these things where there is a financial and legal implication, I always suggest that you consult with a trusted advisor before pursuing something like a bridge loan. You also need to make sure that you have a pretty high confidence level that your existing home is going to be sellable and sellable within a reasonable period of time, because otherwise you're stuck with two mortgage loans for longer than you planned. So thanks for stopping by. I hope this answers your question on what is a bridge loan. If you need any assistance at all in the Naples and surrounding areas when it comes to real estate, I hope you'll give me a call. Again, Renee Hahn, 2 239-287-2576. Thanks and have a fantastic day.