What Is A Bridge Loan?

Should I get a bridge loan in order to buy a house before I sell my existing house?

Today we’re talking about bridge loans. But first, let’s break down what a bridge loan actually is. Understanding this is key to our conversation.

A bridge loan is a type of loan that enables you to buy another house, possibly even with cash, depending on how you set it up. Essentially, the bridge loan uses the equity in your existing property as the basis for borrowing the funds.

For example, if you own a property in New York and want to get a bridge loan on it, you’d essentially be using that property as security. This loan, typically lasting 6 months or less, gives you the cash needed to buy another property. Let’s say you own the New York property outright and borrow $200,000 against it. You’re moving to Woodstock, Georgia, where a house costs $600,000. You need $200,000 for the down payment and qualify for a $400,000 loan. So, you use the bridge loan to cover the down payment, essentially financing 100% of it using the equity from your New York property on a temporary basis.

Granted, once you sell the New York property, you’d use the proceeds to pay off the bridge loan. The money you initially used for the down payment would then be reinvested in your new home. It’s essentially a way to access funds temporarily before fully transitioning them to the new property.

If a bridge loan isn’t feasible or if your home’s equity doesn’t cover all expenses, you might consider a recast option instead.

Here is an example. Imagine you’re buying a new house but need to sell your current one first. With a recast, you qualify for the new house while still owning the old one. For instance, if your current house in New York is worth $400,000 and you’re eyeing a $600,000 home in Georgia, you can proceed with buying the Georgia house with a 5% down payment, which is $120,000. Later, when you sell your New York house, you’ll have more cash on hand. Instead of refinancing, which can be complex and costly, you can use a recast option. You pay a fee, typically around $50 to $200, to your lender. Then, they adjust your mortgage payment based on the new balance, making it as if you had put down the extra cash from the beginning. This way, you can add the proceeds from selling your New York house to your Georgia property without the hassle of refinancing.

In my made-up scenario, your next payment would act as if you put down $320,000 instead of $120,000. With over 20% down, mortgage insurance is removed. This method is useful in such situations.

A bridge loan simplifies this process by combining two payments into one, making it easier to manage smaller amounts.

Alright, so those are two methods for buying before selling: one involves a bridge loan, the other doesn’t. Now, let’s talk about a third option, which is similar to a bridge loan but offers a unique approach where they turn you into a cash buyer.

Companies like Ribbon or Homeward offer a unique solution where they essentially become a cash buyer on your behalf. They start by pre-qualifying you for a mortgage and underwriting the loan. Once they determine your eligibility and you agree to their terms, they originate the loan for you. In the meantime, you proceed to sell your current property. When you’re ready to purchase a new home, they step in and make a cash offer on your behalf, allowing you to secure the property quickly. You then pay a rental fee to occupy the new home until you finalize the sale of your old property and have the necessary cash for the down payment. Once you’ve liquidated the cash from the sale, they proceed to close the loan they’ve originated for you, and the title is transferred to your name. Ribbon operates similarly to Homeward, acting as a guarantor for your offer while you complete the sale of your original property.

If you’re unable to sell your property in time, they will step in and purchase it on your behalf. They’ll charge you a rental fee while you wait, operating as a guarantor to facilitate the transaction. While not traditional bridge loans, they serve a similar purpose by providing the funds needed to move forward with your new purchase before selling your existing property.

That’s all for today! If you’re thinking about buying or selling a home but aren’t sure about your options, like bridge loans or cash buyer programs, CLICK HERE to contact us. We offer free consultations to help you figure out what works best for you!

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