Bridge loans are used when a borrower who has not sold his current home wants to purchase a new home. These loans work to bridge the gap between the sales price of the original home and the purchase price of the replacement home. The bridge loan is secured to the original home, the one that's on the market. The funds from that loan are used as the down payment for the mortgage on the new replacement, or move up, home.
How Do Bridge Loans Work?
Generally speaking, lenders don’t have a set of guidelines when it comes to qualifying for a bridge loan like other programs do. Most lenders will qualify the buyers based on two payments--the payment they make on their current home until it sells, and the payment they make on their new home when they move in. This is because until the first home sells, the buyers will technically own two homes and be responsible for both payments. If the buyers cannot handle this in terms of credit and income, they will likely not be approved for the bridge loan.
If the mortgage for the new home is a conforming mortgage, there is more leeway for the underwriters to approve a higher debt to income ratio. If not, the underwriters will usually restrict the debt to income ratio at 50 percent.
What are the Typical Fees Associated with Bridge Loans?
Expect to pay an origination fee based on the amount of the loan. An admin fee of around $750 will be charged, in addition to an appraisal fee of around $350. An escrow and title fee of around the same amount will be charged. Add in a notary fee averaging about $40, with a recording fee of $60, and a wire fee of about $75. Not including origination fees which will be based on a number of points equal to one percent of the loan amount per point, the buyer is looking at nearly $2,000.
The Benefits of Using Bridge Loans
With a bridge loan, buyers can put their current home on the market with no worries or restrictions. The bridge loan may not require a payment for a few months, giving the buyers time to sell their home and get situated in the new one.