How to use a bridge loan to buy a home
A bridge loan is a financing option that allows you to use the equity of your current home as a source of funding for a new home. A bridge loan is a short-term loan used as a financial bridge between selling your current home and purchasing a new one. Bridge loans are also known as swing loans or gap financing.
Bridge loans are becoming increasingly popular due to their ability to provide quick, short-term financing solutions in fast-paced and competitive markets. In particular, they are often used in real estate transactions when a borrower needs immediate funds to purchase a new property before selling an existing one. With the housing market being volatile and unpredictable, many buyers are finding themselves in situations where they want to secure a new home before selling their current one. Bridge loans provide the flexibility needed to bridge this gap, offering the funds required for a down payment or to complete the purchase while waiting for their existing property to sell.
Many homebuyers use bridge loans to remove the home sale contingency when they make an offer on a new home they are purchasing. A home sale contingency typically states that the buyer’s existing home must sell before closing on the new purchase. However, in a competitive real estate market, sellers may hesitate to accept offers with this contingency.
A bridge loan allows you to proceed without relying on the sale of your current home. Eliminating the contingencies makes your offer more attractive to sellers. In addition, in most cases, there are no monthly payments on the bridge loan, and it is not required to be paid off until after the original home sells. Typically, bridge loans have terms lasting an average of 6 months to 1 year and are paid in full upon the sale of the existing home.
Pros of a bridge loan
- If you need to move quickly and can’t wait for your home to sell, you can use a bridge loan to make a down payment on a new home or to pay off your original mortgage
- Provides an alternative to a HELOC
- No monthly payment on the bridge financing
- No new qualifications are required on the new home purchase
Cons of a bridge loan
- Bridge loans may have higher interest rates and a higher APR
- Significant equity in the home is required
- If your home doesn’t sell by the end of the loan term, you may own two houses and have to manage two mortgages
Mortgage Equity Partners has the MEP Instant Equity program which allows homeowners to access their equity quickly for a down payment and closing costs on a new home. No new qualification is required for the purchase loan, and funds are sent directly to closing. The Instant Equity program can be used on 1-4 unit homes, PUDs, and some types of manufactured homes and condos.
Bridge loans are best used in a seller’s market or a hot geographical area where time is of the essence, and there is stiff competition for available properties. However, as long as you are reasonably sure your old home will sell by or before the end of the loan term, you can confidently use a bridge loan to make a quick offer without a financing contingency.
Contact one of our trusted loan officers today or start a pre-approval process!
