How To Use A Bridge Loan To Buy A New Home Without Selling

Bridge loans are home loans that are used to purchase a second property while using the first one has security. People who are shifting to a new home without having sold off their first one commonly use bridge loans. Many people are required to move to a new home as changes may occur such as birth, marriage, divorce, job transfers, retirement or any other change that requires moving. The question that arises in the minds of most people is should you sell your current house before buying a new house or should you buy first and then sell later.

There are risks associated with both actions. However it is considered far less risky to sell your current house before buying a new one or to sell your house concurrently with the purchase of your next one. The reason is that most of the people will find it extremely difficult to afford owning two houses simultaneously. Most people also need to use the proceeds from the sale of the first horse to buy the next one.

However, many people also take the risky approach of purchasing a new home before selling off their old ones. This is where bridge loans coming into practice. Bridge loan get the money required for the purchase of a second house without actually having sold off the first one they are usually made by pulling out a portion of the equity in the house before it has been sold. This can be risky and these are the reasons why.

Bridge loans are expensive

Since the bridge loan is usually a second mortgage or a home equity line of credit, loan origination fee as well as the interest rate can be significantly higher than conventional first mortgage. The bridge loan interest rate is directly related to the loan to value ratio of existing first mortgage.

You can get at the best possible interest rate on a bridge loan if you keep the total amount of your old house existing mortgage plus for this loan under 75% of the houses fair market value. From a risk assessment standpoint, lenders know that the risk of known before increases tremendously when the loan to value ratio exceeds 75% to 80%.

You could losing a lot of your savings

When you’re use a bridge loan to purchase a second home you may end up depleting a lot of your cash and savings. This could happen if you first home does not sell as quickly as anticipated. In that case you would have to maintain three mortgages that will be the first mortgage on the first home, bridge loan on the home of and the mortgage on your new home. You would also have to pay for separate property taxes, insurance premiums, utility bills is etc. this problem will compound itself if the two homes happen to be located in different parts of the country or state.

You could loose both homes

You could lose both the houses if the property prices happened to decline while you’re waiting for the first one to sell. If that happens you may not be able to sell it for enough to pay off the outstanding loan on the first house. In that case you would have to face foreclosure on a new home to make up for the shortfall.

Bridge loans are okay for people who can afford to maintain the cost of having multiple loans till the first home sells. However, for the common borrower they can be tricky a proposition and a great potential for financial trouble. If the first house has a confirmed sales contract, if your transaction is currently in escrow, you may consider taking a bridge loan since you are very close to selling the first home. However, the deal can always fall through which still makes a bridge loan a risky proposition. Bridge loans should be approached with extreme caution and considered a last resort. Although it may take time to sell your current house and then purchase a new one, it may be the most prudent action to take.


What Is Bridge Financing And How To Use It To Purchase a Second Home

Bridge Financing

Bridge financing is used when a person needs to close on another house before having fully sold his existing house. Bridge financing is a way of using the equity in the existing home to buy another house without having sold it. The house can either have a sale contract, be on the market for sale or not be for sale at all. Depending upon the situation bridge financing can take the form of unsecured line of credit, unsecured line of credit or a HELOC loan.

People can use bridge financing plan when they have exhausted all other sources of borrowing money. Bridge financing allows them to purchase a new home before they can cash out on the equity in their present home. The following are the options regarding bridge loans and line of credit on home equity.

Unsecured Bridge Loans

If your house already has a contract of sale you can choose an unsecured bridge loan. The lender will be accommodating to give you a loan if he knows the date on which are supposed to receive the money for the sale of your house. Unsecured bridge loans are also known as swing loans in the market and they allow a buyer to close on the purchase of a new home before closing the sale on the old house. Since the house already has a binding contract of sale on it the lender protects his interest by knowing when it can get paid back the money and you can get the loan without having to go through the trouble of placing a lien on the property and the expense associated with it. An unsecured bridge loan may be a relatively simple procedure although the interest rate on a bridge loan is high it does not matter much because it is usually for a short period of time till you actually finish the sale on your existing house.

Banks and lending institutions are not all that keen on issuing bridge loans to people. They know that it is a short affair and they will not see the borrower again. They do not stand to make a lot of money out of it if your house is going to be sold shortly. For this season is a good idea to go to the bank who you currently do business with be it a commercial bank, savings and loan association or a credit union. If the offices that are not keen on offering you the service then you can point out in a polite manner that as a customer you expect this service and if you do not get it you are happy to take your business somewhere else.

Secured Bridge Loans

If you do not have a binding sale contract on your house you can use your existing house as a security to get a secured bridge loan or a home equity line of credit also known as flock to make the purchase on a new home. Both are secured lines of credit and can be up to 80% to 90% of the equity in your existing home. While a lender may be willing to grant you the secured Bridge on as a way of marketing the services it does have the shortcoming of limiting your options when looking for the best possible loan terms.

The advantage of a HELOC is that the HELOC lender is not looking for your purchase loan. HELOC is a  profitable businesses on its own although lender will not be very keen to grant you the loan if your house is already on the market or is going to be so soon. In such a case the lender will not make much money on the interest by granting the loan. Also they are likely to charge a cancellation fee and you would have to pay closing costs that they would have voided for a contract that was going to stand for a longer period of time.

In short assuming that you need to buy a new home and in order to to so you need to convert the equity in your existing home without having actually sold it these are the following options available to you:

  • If your house is already under a sale contract, take an unsecured bridge loan.
  • If your house is not yet on the market take a HELOC.
  • If your old houses on the market but unsold take a secured bridge loan.