Understanding Bridge Loans

Understanding Bridge Loans

What Are Bridge Loans?

Bridge loans are temporary loans that bridge the gap between the sales price of a new home and a home buyer's new mortgage, in the event the buyer's home has not yet sold. The bridge loan is secured to the buyer's existing home. The funds from the bridge loan are then used as a down payment on the move-up home.

How Do Bridge Loans Work?

Many lenders do not have set guidelines for FICO minimums nor debt-to-income ratios. Funding is guided by a more "make sense" underwriting approach. The piece of the puzzle that requires guidelines is the long-term financing obtained on the new home.

Some lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. This means the borrower is qualified to buy the move-up home by adding together the existing loan payment, if any, on the buyer's existing home to the new mortgage payment of the move-up home. The reasons many lenders qualify the buyer on two payments are because:

Most buyers have an existing first mortgage on a present home.
The buyer will likely close the move-up home purchase before selling an existing residence.
For a short-term period, the buyer will own two homes.

If the new home mortgage is a conforming loan, lenders have more leeway to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50% debt-to-income ratio.

Home Buying Benefits of Bridge Loans

The buyer can immediately put a home on the market without restrictions.
Bridge loans may not require monthly payments for a few months.
If the buyer has made a contingent offer to buy and the seller issues a Notice to Perform, the buyer can remove the contingency to sell and still move forward with the purchase.

Home Buying Drawbacks of Bridge Loans

Bridge loans cost more than home equity loans.
Buyers will be qualified by the lender to own two homes and many will not meet this requirement.
Making two mortgage payments, plus accruing interest on a bridge loan, could cause stress.