We’re starting to consider bridge loans more often in this low-inventory market. So what is a bridge loan? It’s essentially what it sounds like – a loan that helps bridge the gap for home buyers when they need funds from their current home in order to buy a new home. Previously, a home sale contingency may have been a way to offer a new home and use the proceeds from the existing home, but gone are the days of offers being accepted with home sale contingencies in today’s market.
We asked our friend Jim at Lindell Bank a bit more about bridge loans. What are they, and how can they help our clients? He answered a few of our top questions – see what he has to say below!
What is a bridge loan?
A bridge loan is a loan that is secured by BOTH homes (current residence & new home being purchased). Loan proceeds payoff the mortgage on the existing home and provide funds for the purchase of the new home. The bridge loan payment is billed as interest only, and the borrower is responsible only for paying homeowner’s insurance and real estate taxes when they are billed.
Who is it for?
A bridge loan is for buyers purchasing a new home prior to selling their current home.
How does the loan help secure the down payment?
The bridge loan helps secure the down payment as the loanable equity in the current home can be used for all or a portion of their down payment based on a maximum of 80% loan to value of both homes.
What does the timeline look like for this type of loan?
The closing timeline for a bridge loan typically takes about 3 weeks. There is an additional week, however, for right of rescission (right to cancel), due to using the current residence as collateral (similar to a refinance). Once the current home is sold, the buyer is able able to refinance into a permanent mortgage at any time with no prepayment penalty on the bridge loan. The bridge loan is set up for a 12 month term, but it the buyer’s existing home has not sold before the 12 month term is up, it can be renewed for an additional term. This sometimes happens when improvements are being done on either home which could delay the marketing and sale of the former home.
Still have questions or wondering how this could fit into your home buying strategy? Feel free to reach out to us, or Jim directly. Jim is a Mortgage Specialist at Lindell Bank, who has 12 offices across the St. Louis area. He can be reached at 314-954-4533 or [email protected].