What is a Bridge Loan and How Does it Work?

For seasoned buyers, the home buying journey can bring a mix of emotions. Although you have been through the process before, there are obstacles unique to experienced buyers that can cause frustration. One of these obstacles is purchasing the new home before selling your current home. There is a high demand for cash when purchasing a new home, but you may not have access to additional funds until the sale of your current home.  

One common solution is to place a contingency offer on the purchase. This means that the purchase of your new home is contingent on the sale of your current home, allowing you to secure the property without worrying about additional financing. While a common practice, contingency offers have become more obsolete over the past few years. With the housing inventory at an all-time low, sellers are more likely to accept an offer that has no contingencies.

An alternative solution for buyers is a bridge loan. While a little more involved, a bridge loan could be exactly what you need to ensure that you can purchase the home of your dreams.

What is a Bridge Loan?

A bridge loan is a short-term loan that is used to provide immediate cash flow and help buyers meet financial obligations. This type of loan is intended to help folks “bridge” the financial gap between the purchase of a new home and the sale of a current home.  The loan is secured using the equity in your current home as collateral. The lender will then determine the amount of equity that can be used, all to ensure that when the home is sold there will be sufficient funds to pay off the total amount owed.

How Does a Bridge Loan Work?

One of the more common ways a bridge loan can be used is to fund the down payment of a new home, so that you can place a competitive offer without a contingency. Buyers will then use the proceeds from the sale of their current home to quickly pay off the bridge loan, leaving just the mortgage of the new home.

This option tends to work best for families who want to purchase a home before selling their current home and who expect their current home to sell quickly. While a bridge loan may not be for everyone, it is a viable option for many people in the housing market and can help alleviate financial stress on your bank account.

Are You Interested in a Bridge Loan?

We know how confusing buying a home can be, especially when buyers need to think about the financial security of their family. Our Mortgage Planners will be able to help guide you through entire process, so that you can purchase your dream home with ease. Are you ready to take the next step in buying a home? Contact us today!

 

Author: 

Tammy Zurfluh
NMLS#476483
SVP Mortgage Banking
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