A common dilemma facing homeowners that want to take advantage of current low rates and favorable market conditions to purchase a new home is the sale of their current home. It’s also common to need part or all the proceeds of the sale of the current home to invest in the replacement property.
Although not a new financial product, the bridge loan makes this possible. This is a common product in the construction business and in some commercial transactions, but not as commonly used in a residential transaction where a replacement property is an objective.
Look at how it works and whether it’s something you or someone you know might be interested in.
For clarity and ease of explanation, let’s term the two properties as the current home and the replacement home.
Why not just sell your current home and then go buy a replacement home? The most obvious answer is that you might find yourself homeless for a time because of starting the home search process after you sell your current home. A secondary factor is the current housing inventory shortage and the fact that quick action is going to be needed to secure a replacement property.
A bridge loan enables a home seller interested in a replacement property to flip the script, so to speak.
With an approved bridge loan, a homeowner continues to reside in their current home while they shop for a new one with the assurance of prearranged financing to purchase a replacement property. The lender that approved the bridge loan would place a lien – AKA mortgage – on both the equity in the current home and a mortgage on the replacement property. This process enables a homeowner to access cash to close the deal on the replacement property and then place the current home on the market. Of course, there are expenses and timetables that play into this scenario, but it’s the perfect tool to make a transition from a current home to a new one when the equity in the current home is needed to purchase the replacement property.
Because of our high-demand, low-inventory market conditions, most real estate brokers discourage buyers and sellers from accepting too many closing contingencies. A buyer that “must” sell their current home to purchase a replacement property is at a huge competitive disadvantage. The bridge loan is the tool that mitigates that disadvantage.
HOW DO YOU FIND A BRIDGE LOAN LENDER? As always, I recommend shopping locally. A google search will turn up hundreds while the best bet is going to be a local bank or just ask your Realtor for a recommendation.
A final piece of advice is to get a good written estimate of the costs involved in a bridge loan. After all, it’s two loans and there are expenses associated with each. Also, note qualifying factors exist for both the properties and the borrowers that a lender will review before approval. Local lenders will walk you through the process to confirm this product is a good fit for you and issue a preapproval letter before sending you out house shopping.
As always, seek legal advice if asked to sign a document that you don’t understand.