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What Are Bridge Loans and Why Might I Need One?

What are Bridge Loans and why might I need one?

Bridge loans are temporary loans, secured by your existing home, that bridge the
gap between the sales price of a new home and the homebuyer’s new mortgage
in the event the buyer’s existing home hasn’t yet sold before closing. In other
words, you’re effectively borrowing your down payment on the new home using
the equity from your existing home.

Why can’t I just wait until my home is sold and use the equity from the sale

If you have both the liquid funds available (not tied up in the equity of your
current home) for the new down payment and you can qualify for a new
mortgage including the existing debt of your current home, you can!

If you don’t, sellers will want a commitment for financing to have assurance the
sale will go off without a hitch. A bridge loan approval gives sellers the assurance
that they will not have to wait for your current property to sell. The Washington,
D.C. area real estate market is extremely competitive. It’s very rare that purchase
contracts will be accepted with home‐sale financing contingencies that will allow
for a closing to happen once a buyer has his home sold.

What are the benefits of a Bridge Loan?

  1. You can use the equity from your existing home without having to sell it
  2. You can put bids in without home‐sale contingencies for financing.
  3. You can get out of your existing home quickly (purchase bridge loans can
    close in 14 days), which will enable your realtor to de‐clutter, stage and sell
    it quickly!

Are there any drawbacks to Bridge Loans?

    1. Since the bridge loan is a temporary loan, the costs associated with getting
      one are higher than regular home equity loans.
    2. You will still need to make you existing mortgage payments and bridge loan
      payments until your home is sold. This is sometimes stressful for people
      (especially if their house doesn’t sell quickly which we’ll get to next).

What if my house doesn’t sell quickly?

While I can’t speak for all lenders in the marketplace, as long as you and your
realtor are making a good faith effort to market the property, and you’ve reduced
the original asking price accordingly to try and attract more offers, we will work
with you to extend the terms of the original bridge loan if you are having trouble
selling your home.

Doesn’t a Home Equity Line of Credit (HELOC) accomplish the same thing as a
Bridge Loan?

Yes. If you have one in place, and can qualify for a new home with the
HELOC payment (in addition to the current first mortgage payment and new
home mortgage payment) a HELOC is a good substitute for a bridge loan. Be
careful though before opening one up. The lender calculations for HELOC
payments are MUCH higher than the actual payment. Most people don’t realize
this. Ex. If you have a $200,000 HELOC and you only need to use $50,000 of it for
your new purchase, the lender will still calculate a qualifying payment assuming
you borrow the full $200,000 as there is nothing stopping you from doing this
once we approve the loan. The lender has to assume the worst case scenario.

Seth Opert NMLS#18511

Mortgage Specialist

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