Residential Bridge Loans

What is a Bridge Loan?

Bridge loans are short-term mortgage loans that provide you with the down payment or necessary funds to buy another home before you sell your current home.

The timing of completing the sale of your existing home and buying another oftentimes can be a problem since you are unable to control the buyer's financing of your home. The sale of your current home may fall through or be delayed no matter how qualified your buyer is.

It is not all that uncommon and can cause you to lose out on the perfect home you're under contract to buy. With most homes for sale in Denver, Colorado Springs, and Fort Collins receiving offers from multiple buyers you want to put in the best offer you can, whether it's a large down payment or an all-cash offer.

"A bridge loan is considered a very effective method to buy a new home before selling your present home."

How Does a Bridge Loan Work?

There are two ways a bridge loan can be arranged. The first method is to use it to refinance and payoff your first mortgage with excess proceeds, or cash out. These proceeds provide the necessary funds on the new home's down payment. For example, your current property is worth $700,000 and your current mortgage balance is $180,000. You need a $200,000 down payment for the new home you're buying. You get a bridge loan for $380,000 with interest only payments.

You may want to consider a bridge loan and pay it off with the sale profits once your current home is sold. The monthly payments can be paid as interest only rather than principal and interest payments.

The second scenario relies on the value of both homes. Instead of using only the value of your existing home, you are provided a bridge loan that covers both homes. The new bridge loan will be cross-collateralized onto both homes.

With this method your monthly income will have to pay for both house payments. You do not have to qualify with your income because it is based on your credit and equity. Once your old home is sold, you pay off or pay down the bridge loan to 50% of the balance or refinance the new home from the bridge loan.

IMPORTANT: if you want a bridge loan to be cross-collateralized the bridge loan must be $1,000,000 or more. This means your home's value must be $1,428,000 or higher because the maximum loan to value limit is 65 to 70.

For example, your current property is worth $1,428,000 and your current mortgage is $150,000. You want to pay all cash for a new home selling for $1,450,000 in a great neighborhood. To achieve that, you need $1,450,000 in a couple weeks. The residential bridge lender will allocate $750,000 on your existing home and $600,000 on the new home worth $1,450,000 totaling $1,350,000. In addition, you're putting in $100,000 from your savings.

Why do this?. Your all-cash offer beats out the other offers with financing contingencies.

Minimum Loan Amount for Bridge Loans

For investment properties: $250,000 (subject to change)

For primary residences: $200,000 (subject to change)

Maximum loan to value: 60-70

Advantages

1. If your income is low or you have high DTI, you can still be approved since it's based on your home's value
2. less documentation to qualify

 

The drawbacks of bridge loans are:

1. higher borrowing costs
2. interest rates from 7.99%

Bridge loans are structured and agreed upon to be paid off within 6 to 12 months. If you do not repay the bridge loan after one year there are no extensions. The lender may start the foreclosure process. If you believe your area has slow sales it may be wise to look into some less costly and more stable alternatives.

Alternatives to a Bridge Loan

Cash Out Refinance

This approach may be the closest thing than to get to a actual bridge loan. The best way to make it work is:

• If your home isn't going to be sold quickly, refinance before you list it with a real estate company
• Apply for a loan with the lowest interest rate

The loan amount requested needs to take some cash out for the down payment on the next home and cover 3-6 months of mortgage payments. Your income will also have to qualify to use a cash-out refinance. The advantage of a cash out-refinance vs. a bridge loan is it's lower cost.

Home Equity Loan

A large majority of lenders will not approve a loan for home that is listed for sale. This is especially true for a home equity loan or line of credit. If it is, that fact will almost certainly be noted on the appraisal.

Lenders offer home equity loans and lines of credit to have terms of 10 to 20 years, not six to twelve months. Nevertheless, before listing your home for sale you may want to pull out some of your home equity for the down payment.

You will need to qualify for the new home equity payment in the debt to income ratio (DTI) calculation by the underwriter. Keep in mind that your qualifying income must be able to support your existing mortgage, the home equity loan, and the mortgage on the next home your buying which makes it very challenging.

With a bridge loan, the qualifying income and high DTI is not a factor. This is where the bridge loan's advantage really shines.