The Basics of a Bridge Loan

Posted by Carey Frankel on Friday, February 3rd, 2012 at 10:13am.

If you haven’t sold your home yet, but you are ready to buy a new home, you may be looking for short-term cash for the down payment on your new home until your current home sells.

For many homeowners of Ponte Vedra homes, the answer to their short-term cash flow problems is solved with either a bridge loan or a home equity loan. With lenders stricter than ever about loaning money, many won’t approve home equity loans for homes that are currently on the market. And that’s where a bridge loan comes in.

What is a Bridge Loan?

A bridge loan is a temporary loan that is designed to “bridge” a cash flow gap until a homeowner’s home sells. Like a home equity loan, a bridge loan is secured on the homeowner’s current home, not the one they are purchasing. Any money given to the homeowners through a bridge loan is used to secure a down payment in an effort to purchase a new property before the existing property is sold.

A bridge loan is often obtained through the same lender they used to obtain financing for their new home. As such, it is quite often for the lender to combine the payment for the new mortgage with the bridge loan payment.

Who Qualifies for a Bridge Loan?

Just like primary mortgages, bridge loans require minimum FICO scores and minimum debt-to-income ratios. If the new home is financed under a jumbo loan, there may be more restrictions placed on the bridge loan.

What Fees are Involved with a Bridge Loan?

Bridge loans, in general, come with higher fees than home equity loans. Interest rates are typically higher for bridge loans, as they come with a higher risk to lenders. Many times, bridge loans come with no payments, but interest accrues until the existing home is sold and the loan is paid off. Other fees associated with bridge loans include: administration loans, appraisal fees, escrow fees, notary fees and recording fees, among others. It is also important to keep in mind that bridge loans come with origination fees, which typically come with points, or about one percent of the cost of the loan.

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