Bridge Financing & How to Buy a Home When You Still Own One
By: Greg Schliesmann
NMLS # 234288
In today's real estate market, it's hard enough to find a decent listing and have a chance to visit it before someone else makes and offer and snatches it up. With historic levels of buyer competition (see my Buyer Competition videos), you're often at a huge disadvantage with a home sale contingency.
A home sale contingency is when your offer to purchase a home is contingent upon selling your existing home first. Obviously, a seller does not want to wait for you to sell your home first. In this market, it's often very difficult to get your offer accepted with a home sale contingency.
So here's the dilemma... How do you get the funds to purchase your next home when you still own your existing home?
That's what Bridge Financing allows you to do.
How does a bridge loan work?
Bridge financing provides a loan on your existing home for sale
Typically, payments are interest-only for a period of time until you sell
The amount of financing is based on a percentage of your home value minus your existing mortgage
Bridge financing normally goes up to 80% of one's home value
Limitations of Bridge Financing
Bridge financing is highly sensitive to equity. You need a fair amount of equity to get a bridge loan. Typically 80% of the home's value is the maximum. Why is that?
For one thing, lenders need to be sure they will get paid off fully when the home sells. Often homes don't sell for 100% of their appraised value. Sometimes sellers reduce the price if the home doesn't sell quickly.
On top of that, there are Realtor fees, taxes, and closing costs the seller needs to pay at the same time. There needs to be enough equity to pay everything and allow extra cushion in case of any difference between the appraised value and final sale price.
Secondly, bridge financing is low reward for lenders. Whatever costs and interest lenders charge are basically covering their costs -- we hope -- to do these loans. The loans are relatively small on average (compared to most first mortgages) and last a short time (they're made for people who want to sell). In fact, with all these considered, bridge loans often result in a small loss to the lender. Bridge loans are basically a "wash" or a loss leader to encourage the overall relationship between the lender and the borrower.
There's no margin of error on bridge loans to have a situation where they don't get fully paid off. There needs to be extra cushion.
Third, the payments on a bridge loan do not pay down the loan. The payments are interest-only. This makes it easier for you to afford while carrying multiple mortgages for a time. On most other loan types, the payments reduce the balance, which reduces risk to the lender over time.
Example of Bridge Financing Amount
This is the formula to calculate the potential bridge loan amount:
Appraised value x 80% (or allowed LTV)
Minus existing mortgage lien(s)
Appraised value: $200,000
Mortgage outstanding: $100,000
The calculation would be:
$200,000 x 80% (=) $160,000 max financing
(-) $100,000 existing mortgage
(=) $60,000 maximum bridge loan
Other Considerations with Bridge Loans
Not everyone qualifies for a bridge loan. On top of that, even if you qualify for a bridge loan, that doesn't mean you'll qualify for your next purchase loan when the Bridge loan payment is thrown into the equation. We need to make sure you qualify for both.
One of the important qualification factors is debt-to-income ratio. If you do not sell your home prior to purchasing your next home, you'll need to qualify to afford all of your current payments, including your current home, plus the bridge loan, plus the mortgage and other costs on the new property. This is calculated by looking at all of these payments as a percentage of your income.
It's important to talk with us in advance to help you plan and prepare.
We provide access to bridge financing in Greater Milwaukee through one of our partnerships. We'll be happy to help you explore your qualification for bridge financing and how it fits into your overall plans.
Home Buyer Competition
If you're concerned about the home buyer competition problem, this is one important element of your overall strategy. But you should spend some time learning more strategies to set yourself apart from other buyers. We discuss this in my Home Buyer Competition videos. Our VIP FasTrak Program is also designed to give you a key edge in this area. Make sure to see that video.
Thank You For the Info. Please Help Me Explore My Options!
That's what we were born to do!
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