Homeowners often find themselves in a precarious position when they’re looking to buy a new house, but have yet to close on the sale of their current house. A residential bridge loan is aptly named; it’s a loan that can bridge the potential gap between selling one home and buying another. In other words, a residential bridge loan can give homeowners the cash they need to close on their dream house, when they need it.
A residential bridge loan is, by its nature, designed to provide a financial bridge for a short period of time–typically somewhere in the range of six to ten months. Since it is a short-term loan, the interest rates are a bit higher than comparable 15 or 30 year fixed rate conventional mortgage. However, it’s important to remember that since the loan timeline is so short, the actual amount of interest paid over the course of the loan is a relatively small amount.
Residential Bridge loans are a tool, they’re not designed to fit every home buying scenario, but are the perfect solution to the problem they were created to solve: when a homeowner has not yet sold their current house, but needs funds to close on their new one. Or when a retired buy can’t quite qualify to purchase a new home until they sell their existing home. A residential bridge loan provides the following benefits:
- Convenience: A person may make a decision to buy before selling to avoid the inconvenience and upheaval of moving twice. Balancing the timing of closing on a home sale and a home purchase is incredibly difficult. Often, people end up having to pay for short-term housing solutions if their house sells before their new house is ready By taking a bridge loan, the timing is no longer a concern. Residential Bridge loans allow homeowners to purchase their next home when they want it, and sell on their own timetable.
- Get the Mortgage You Want: By applying equity from your existing home to your new one, you may be able to reduce your new mortgage below the higher-rate “jumbo loan” level. Or, you may just want to minimize that new mortgage overall and save yourself thousands of interest from less than desirable mortgage terms. When it comes to taking on more debt, the more you can do to apply your payments to the principal as opposed to the accumulated interest the better. Taking a residential bridge loan now to set yourself up for financial success in the future is an idea worth considering for many.
- Help you Qualify: A residential bridge loan can also help people who are self-employed or who have substantial tip income. These type of borrowers must have a two year history of this type of income from their tax returns, to count this income for qualification purposes. If a borrower has less than a two year history of self-employed or tip income, then this income may not be counted for a conventional loan. If a borrower does not want to wait until they have a documented two year history on their tax return, then a residential bridge loan is a great option. We recently had a customer who could document solid tip income but they only showed this income for a 1.5 years. We helped the client by providing them a short-term residential bridge loan for 1/2 a year until their next tax return was filed. Once this tax return is filed we then refinanced them into a loan term fixed rate mortgage. This allowed the client to purchase their dream home without having to wait until they had two years of income history.
- Need to Free Up Down Payment funds from your Old Home: A residential bridge loan can be designed help you free up funds from your old home for a down payment on a new home.
A residential bridge loan can be structured to address the above examples as well as any other situation where the borrower can’t qualify for a conventional loan due to a timing issue that will resolve itself in a matter of months. While a residential bridge loan is not perfect for every situation, it can be a financial godsend when utilized correctly. Homeowners who are in the process, or considering beginning the process, of purchasing a new home should do their research and decide if a residential bridge loan is right for them. The real estate market is as competitive as ever, and utilizing bridge loans to create more enticing offers for sellers is a proven way of winning bidding wars.
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