What Is a Bridge Loan and How Does It Work?

If you had to make a list of some of the things that cause people stress when it comes to real estate, uncertainty would almost always be right at the top.

You’ve found an incredible new home that won’t be on the market for very long. The problem is that you’re not quite sure if you can sell your current home quickly enough to secure the funds necessary for the down payment. In that situation, what do you do?

Thankfully, a solution is available. It’s called a bridge loan, and it brings with it a wide array of different benefits that cannot be ignored.

What Is a Bridge Loan? Breaking Things Down

Bridge loans are commonly referred to by many names including interim financing, swing loans and others. Regardless, they all operate in essentially the same way: they give people access to critical funds during a period when they don’t have other options.

It’s best to think about a bridge loan as a short-term form of financing. Consider the example of someone who is selling their current home while trying to buy a new one at the same time. Obviously, they would want to wait until their existing home is under contract before putting money down on their new one.

But sometimes, that existing home may not sell quite as quickly as you’d hope it would. You were planning on using the money raised from the sale to purchase the new home, but at a certain point it becomes clear that isn’t going to happen.

That is precisely where a bridge loan comes into play.

Bridge loans usually have a repayment period that lasts anywhere from between six months to one year. This can provide you with the extra time needed to both A) secure the funding needed for the new home, and B) wait until the right buyer makes an offer and enters into a contract agreement for the existing one.

More than anything, bridge loans give you access to the additional money needed to carry out your real estate goals without worrying about how you’re going to secure the funding needed to do so.

Even going beyond that, bridge loans are helpful in a wide range of different situations. Examples include but are certainly not limited to ones like:

• You can’t afford the down payment on a new home before you sell your current one, and your current one is still active on the market.
• For whatever reason, you have an urgent need to obtain a new home.
• The closing date for your sale and your new purchase don’t line up. This is common in situations where the closing date for your new home is after the closing date of your current one.
• You want to secure a new home before you even list your existing one.
• You’ve encountered a situation where the sellers in your area may not be totally comfortable with a contingent purchase offer.

That final point is particularly important, as contingent offers have fallen out of favor given the fast-paced real estate market that we’re experiencing right now. With a contingent offer, Person A makes an offer on a home that is contingent upon the fact that their existing home sells by the closing date. In the event that the home doesn’t sell, the entire deal falls apart – something that would impact multiple parties.

Not every seller is going to agree to that level of responsibility (not to mention risk), especially if there are multiple homeowners in the chain. It’s not uncommon for there to be many different parties in this decidedly unique relationship (Homeowner A is selling to Homeowner B who is selling to Homeowner C, etc.) and if anything goes wrong at any point, it could cause a series of transactions to fall through.

You can’t necessarily fault someone for being unwilling to go through this process and thanks to bridge loans, it’s not something that you have to worry about.

The Benefits of a Bridge Loan

There are a few main reasons why bridge loans have become so popular over the last few years in particular.

The first is that they can be used as what is essentially a second mortgage, allowing a homeowner access to funds to put towards the down payment on a new house until they can sell their existing one. The second is that it offers the opportunity to take one large loan to pay off the mortgage on their current home, which then allows them to put the remaining funds towards the down payment on their new one.

As mentioned, bridge loans tend to have terms ranging from six months to one year. The key thing to understand is that they use the customer’s current home as collateral to secure the loan.

Normally, they’re only issued by financial institutions who will also agree to finance someone’s new mortgage – meaning that the bank knows they’re going to be in a long-term relationship with you despite the short-term nature of the loan itself. This essentially reduces the amount of risk that they’re taking on in their eyes, which makes the situation more favorable in the long-run.

In the end, bridge loans are a great option for people who find themselves in what could be a very difficult situation. Yes, the real estate market is “hot” right now – but that won’t always be the case. If you find the perfect property before you’ve had a chance to sell your existing one, a bridge loan can be a great way to accomplish your goals without having to deal with the financial stress that often comes along with this process.

If you have any additional questions about bridge loans and exactly how they might impact the purchase of your next home, or if you’d just like to discuss the specifics of your own situation in a bit more detail, please don’t delay – contact AmeriMac Appraisal Management today.