How Do Bridge Loans Work?

If you are a real estate buyer who has found a new home you want to buy but haven’t been able to sell your current home, you must be researching the mortgage options you have. Apart from adjustable-rate and fixed-rate mortgages, you have another option known as short term bridge loans. This can solve all your financial problems.

Bridge Loan

In simple terms, a bridge loan is just a loan given to you for a short period that you can use for real estate transactions. You can get this loan when you don’t have the funds to buy your new property before selling your current property. It is a temporary financing solution that provides you with a figurative bridge for purchasing an additional home before you have sold your old home.

Each lender has a different standard for bridge loans. However, in most cases, the amount of loan that you can borrow is about 80% of the combined value of your old and new homes. For example, if your old home is worth $100,000 and the new home that you are buying is worth $250,000, then the maximum short-term bridge loan amount would be ($100,000 + $250,000) x .80 = $280,000.

How Do Bridge Loans Work?

As mentioned above, you can use a bridge loan for buying a real estate property before you have finalized the sale of your current property. It is a short-term financing solution for funding the purchase of your new home. Many people use it to cover the closing costs of their new mortgage.

A bridge loan can also be used to present an offer to buy a home without a financing contingency, a contract clause allowing the buyer to get their money back without penalty if they cannot secure financing. Sellers usually prefer offers with fewer contingencies, but as a buyer, you should have some protections in place so that you don’t lose your money if you are unable to secure funding.

While dealing with a hot housing market, a bridge loan is exactly what you need to get yourself a leg up over all the other buyers. For instance, if the seller wants to make a quick sale, they will be willing to deal with the buyer who already has the money to quickly close the deal.

How to Repay the Bridge Loan?

You have to pay the bridge loans back in less than 12 months. Most people use the money they get from selling their current home to pay off the bridge loan. However, there are some other ways to repay your loan. You can structure your loan in several different ways. One of the most common ways is setting up a balloon payment when the loan’s full amount is due at a specific date.

If you have found your dream house and don’t want to risk submitting a contingent offer or have found the perfect job and have to relocate, a bridge loan is a perfect solution for you to meet your needs. However, it is important that you research short-term bridge loans before you take the plunge.