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What is a Bridge Loan?

If you want to buy a new home you may be wondering how you’ll juggle selling your current home with taking out a mortgage on your new home. One option for homebuyers in this situation is to take out a bridge loan. A bridge loan can give you the money for a down payment on a new home before the sale of your old home goes through. Let us explain.

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Bridge Loan Basics

A bridge loan is one answer to a common problem. Say you’re already a homeowner and you want to buy a new home, either to upgrade your living space or because you’re moving to a new city for a job opportunity. Unless you have a big financial cushion, you probably don’t have enough money to make a down payment on a new home before your old home sells.

One option in that situation is to include a contingency in your contract for the home you want to buy. The contingency would stipulate that you won’t buy the new home until the sale of your old home goes through. But if you’re in a competitive real estate market, sellers might not accept that kind of contingency, or the contingency might put you at a disadvantage relative to other buyers.

Another option is to find a way to get the cash for a down payment before your home sells. You can do this with a home equity loan or a bridge loan. With a bridge loan, your old home is the security on the loan. You’ll pay origination fees and closing costs on the loan. Once those costs and fees have been covered, you’ll have some money left over to put down on a new home. In many cases, the lender that issues your bridge loan will insist that you use them for the mortgage on your new home, too.

Pros of a Bridge Loan

What is a Bridge Loan?

A bridge loan can make it possible for you to break into a competitive real estate market or make a move quickly, without having to rent while you wait for your home sale to go through. If lack of a down payment is keeping you from buying a new home, a bridge loan can provide you with needed funds.

Another advantage of this type of loan is that it removes the need to make a contingent offer on a home, or add a contingency to your contract on a new home that says you won’t go through with the purchase until your home sells. Sellers are more likely to move forward with your deal if you don’t insist on this kind of contingency. Potential buyers for your existing home will have more time to finalize their deal, too. Plus, payments on bridge loans usually aren’t due until a few months after you close on the loan.

Cons of a Bridge Loan

All About Bridge Loans

Bridge loans carry some serious risks, however. The biggest one is the risk of foreclosure. Because your old home is the security on your bridge loan, the lender could foreclose on the home if you default on your loan. That would leave you with more debt than you had before you took out the bridge loan – and no home.

Another disadvantage of the bridge loan is that it’s quite a costly way to get funds. The fees and costs associated with the loans can eliminate the potential benefit of the loan. And, if your bridge loan lender stipulates that you must get your new mortgage from them, you’ll be limiting your ability to compare mortgage rates and find the best deals.

Bottom Line

A bridge loan can sound like a great way to secure funds for a down payment while you wait for your home to sell. In practice, however, the loans can be costly and risky. Ideally, the timing of your home sale and home purchase would work out perfectly, but in practice many people rent between home purchases to “bridge” this awkward transition.

Tips for Buying a Home

  • Make sure your credit score is in good shape. With a high credit score, you can get lower mortgage rates, which translates to lower monthly mortgage payments.
  • Talk to a financial advisor about how buying a home will factor into your larger financial plan. Especially if you’re unemployed and not bringing in a regular income, you want to ensure you can purchase a home without sacrificing your other financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/BackyardProduction, ©iStock.com/monkeybusinessimages, ©iStock.com/tab1962

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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