How Does a Bridge Loan Work?

Posted on Monday, September 12, 2022 in Mortgage Lending

How Does a Bridge Loan Work?

Buying a new home before you sell your existing one can be challenging. Most people rely on the money they will get from the sale of their current home to fund the purchase of a new one. But closing dates sometimes don’t align, and that can put yourself in a precarious financial situation.

If you have equity in the home you are selling, a bridge loan could get you through this short-term dilemma and make buying a new home easier. Equity in your home is the difference between the current market value of your home and what you owe.

What is a bridge loan?

A bridge loan figuratively “bridges” the financial gap. It is a short-term loan that may be used when the buyer lacks the funds to finance the purchase of their new home without the prior sale of their first property.

The maximum amount you can borrow with a bridge loan is 90 percent of the value of your current home. For example, if your current home is worth $250,000 and you owe $100,000, your maximum bridge loan amount would be calculated this way: $250,000 x .90 – minus $100,000 = $125,000.

Your bridge loan is secured by your first home as collateral. Therefore, lenders will require a certain amount of equity in your existing home to qualify.

In a hot housing market, a bridge loan can help you get a leg up over other buyers. A seller is generally more willing to make a good deal for a buyer who has the money to close quickly.

How do you repay a bridge loan?

Bridge loans can be structured differently but are typically repaid within 12 months or less. The objective is to pay off your bridge loan with the money you get from the sale of your original home.

Bottomline

As with any loan product, bridge loans have potential advantages and disadvantages for borrowers. Before applying for any mortgage loan, it’s important to speak to one of First National Bank’s mortgage loan experts.

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