What You’ll Learn
When a bridge loan makes sense—and when it doesn’t
How the bridge loan process works for you and your client
What makes the bridge loan program at Better Mortgage unique
First things first. What exactly is a bridge loan?
A bridge loan is a short-term loan designed to help homebuyers purchase a new home without having to wait for the sale of their current one. Some buyers may have enough home equity that they can finance the new purchase in cash. But with a bridge loan, homebuyers can use the equity they’ve built up in their current home to finance the down payment on a new one. Bridge loans can only be used towards the purchase of a new home (down payment and closing costs), “bridging” the time between the sale of the original home and the purchase of the new one. Once the original home does sell, the homeowners use the money from that transaction to pay off the bridge loan so that they’re left with only the new mortgage and home.
When a bridge loan makes sense
Bridge loans can make a lot of sense for some homebuyers, but not all. Is a bridge loan right for your client? Here are a couple things to keep in mind.
First, bridge loans are intended to fund the purchase of a new primary residence. It’s harder (but not impossible) to use a bridge loan to buy a second home or investment property. Bridge loans are also meant for people who either have the majority of their assets tied up in their home or who do not want to touch other assets.
The most common scenario for a bridge loan is one where a homebuyer doesn’t want to (or can’t) sell their current house before buying their next one. Here are a few reasons why people choose bridge loans:
Selling a home is a huge undertaking—from moving, staging, finding an interim place to stay, and of course, connecting with a buyer. Bridge loans make it possible to sell a home in less stressful circumstances, i.e., after purchasing a new home.
In competitive markets with high-priced homes, most homebuyers can’t afford to carry two large mortgages. People in this position are often forced to make a contingent offer, which is far less competitive. A bridge loan helps buyers avoid this predicament.
In some cases, the timing just doesn’t work out. Let’s say a homebuyer finds their dream home but their current home isn’t ready to list; maybe it needs to be staged, needs renovations, etc. A bridge loan means they don’t have to miss out on that opportunity.
When bridge loans might not be ideal
Despite the many benefits of bridge loans, they don’t always make financial sense for everyone. Here are some scenarios where a bridge loan might not be the best move for your client:
Your client wants to sell their home quickly. We need enough lead time to fully underwrite them before they can confidently put in an offer, so bridge loans don’t always work out if your client is in a hurry.
Your client has less than 20% equity in their home. In this case, they don’t qualify for a bridge loan.
Your client is looking to buy a second home or an investment property. We’re unable to exclude DTI for these homebuyers, making it more difficult for them to qualify. While still theoretically possible, the buyer would have to demonstrate enough income to carry all of the debt of both loans.
How a mortgage bridge loan works
While bridge loans might sound complicated, the process is easily broken down into three distinct stages.
Stage 1: Shopping for a new home
For example, say your client has $700k left on their current mortgage, and $300k in equity (what's already been paid off). They decide they want to upgrade to a new home and start looking at properties.
Stage 2: Bridge loan funds down payment
They take out a bridge loan against their current home equity, which goes towards the down payment on the new home. Another $100k from savings also goes towards the down payment.
Stage 3: Selling an existing home
To qualify for the bridge loan, their existing home must be listed with an approved broker. Once that happens and they sell that home, the mortgage and bridge loans are paid off and they're left with the new mortgage.
Our bridge loan process for you and your client
- Your client has a phone consultation with a Bridge Loan Expert to discuss their scenario and financial information.
- If a bridge loan makes sense for them, Better Mortgage does a full underwrite for the bridge loan and the first lien if applicable (approx. 3 business days per underwrite).
- If underwriting goes well, your client receives a fully underwritten pre-approval for the bridge loan and the first lien, if applicable. They can confidently put in an offer on a new home.
- You, the agent, work with your client to find a new home. Once their offer is accepted on a new home, your client locks in a rate on their new mortgage loan.
- Better Mortgage completes processing of third-party orders on the new property.
- Once everything is approved, the bridge loan and new first lien are funded. Your client now owns the new home and departing residence.
- You and your client sell the original residence. Any existing mortgages, including our bridge loan, are paid off.
Q&A with a Bridge Loan Expert
Bridge Loan Expert
What is the bridge loan structure and term?
A bridge loan is meant to be a short-term solution to facilitate the purchase of a new property. Because of this, our bridge loan is a 12-month (360 months for Texas) interest-only loan. Each month, your client will make an interest payment. At the end of the term—either 12 months or when the original residence is sold—there is a balloon payment of the principal balance.
What are your bridge loan rates?
Bridge loans are subject to higher fees and interest rates than standard mortgage loans because the lending term is so much shorter (typically no longer than a year.) It’s not unusual for a bridge loan rate to clock in anywhere between 8%-10%. While some might balk at this number, bridge loans are still worthwhile to many homeowners for the convenience they deliver—fast access to funding and the flexibility to buy a home when they need it.
Ready to move forward with a mortgage bridge loan?
If you think a bridge loan is the best next step for you or your client, let’s talk. We’re here to answer any questions you might have. Get in touch with us by phone at (844) 875-1234 or email us today.