Bridge loans. What are they? How can a bridge loan help you buy your next house? The short answer is that they can help you leverage your equity in your existing home to purchase another one. But let’s talk about how they work best, and who they work best for.
Nashville, and surrounding areas are fast moving markets. We have a lot of buyers, and not a lot of property for sale, that’s what it means when you hear guys like me say, “we have limited inventory”. So it’s the exact type of market that a bridge loan can work well in. And, in a fast paced market, a loan like this can give you a competitive edge, because it could be the answer to problems that some sellers face.
The way to sell a house is different for everyone. Some people have the ability to sell the one they live in now, and go move in with family while the deal closes, maybe putting their things in storage until they find a new one. Some people can afford to buy their new house before they sell their existing home. Some people can rent for a short term. A more common solution is to start looking for a new house, put out offers contingent on the sale of your existing home, and then once an offer is accepted, list your house. The problem is, you don’t have the same advantage of anyone that doesn’t have that contingency. This is where a bridge loan can be helpful.
You need to have at least 20% equity in your current home, and a lender will look at all the same things as they would with a mortgage application, but it can work in a couple different ways. One way is to pay you % of the value of your home, and if you owe less than what they offer plus whatever closing costs will be, you would receive a benefit that could then be applied to the purchase of a new home. Essentially the loan is used to pay off your current mortgage, and offer you some additional capital to put toward a new purchase. The other way they work is to lend you 80% of your equity, treated as a second mortgage, that could then be applied toward the purchase of a new one. Either way, a bridge option will require that your existing home sells. Because the loan is contingent on the sale.
These are short term loans with high interest rates and fees, but they can work really well for areas in our market that are selling very quickly, because payments can also be deferred, or interest only for a time. A lender or a REALTOR should be able to confirm whether your house is in a good position to sell quickly.
This typically isn’t a first choice for sellers. Let’s face it, it’s borrowing money to borrow money. But if you find yourself needing a competitive advantage over other buyers, or you need help with a down payment, maybe you just need a way to secure a new home before you list your existing home, well this can help out a lot. It’s also helpful if you end up needing to close on your existing house after you need to close on your new one.
There are other types of loans you may consider likeHome Equity Lines of Credit or 80-10-10 loans, but these come with their own stipulations and may only work in certain situations. I hope this helps, but if you would like to talk more about it, give me a call.