Many homeowners and home buyers in California have probably heard of a bridge loan but do not know what it is or who should obtain one.
A bridge loan is usually a short-term loan (usually written for three months to three years) that provides funds to buy real estate from a piece of real property that an owner has an intention of selling, but will not close before escrow closes on the new property.
This transaction is called a bridge loan because these funds "bridge the gap" between the closing of two transactions.
Let's look at an example of a bridge loan. Bill and Betty Buyer would like to purchase their California dream home for $800,000. The down payment required is 20%. They have enough money saved for the closing costs and cash reserves, but little else saved.
Their current home is worth $500,000. The existing balance on their mortgage is $50,000. They have $450,000 in equity.
Bill and Betty would like to make an offer on the new home non-contingent on the sale of their current home. How, they wonder, can they make this offer?
Enter Bob the Bridge Loan Guy. He tells Bob and Betty that he can help them obtain a $210,000 loan on their current home ($160,000 for the down payment plus $50,000 to pay off their current mortgage). Bob the Bridge Loan Guy has figured out that the Buyers can qualify for both the bridge loan and the purchase loan because their debts on both the current home with the bridge loan and the new purchase loan are less than the maximum amount of debts to qualify.
The Buyers successfully make their offer and close escrow 30 days later. Another 30 days later they close escrow on the home they listed for $500,000. They use $210,000 from the proceeds of the sale to pay off the bridge loan, and use the other $290,000 in proceeds to pay down the new mortgage.
A few important tips you should know if you are considering a bridge loan:
- You must be able to qualify for the bridge loan and the loan to purchase the new home.
- There is no guarantee that your current home will sell quickly. How long can you afford to pay mortgages on two homes?
- A bridge loan is usually more expensive than other types of loans. Consider other types of financing (do you have an equity line of credit available, for example?)
- A bridge loan may be available with stated income under the new Reg Z guidelines as of October 1, 2009.
Do you need help structuring a loan, or getting a rate quote? Call me at (650) 222-0386, or e-mail me.
This is not an offer for extension of credit or a commitment to lend. All loans must satisfy company underwriting guidelines. Information and pricing are subject to change without notice. This is not an offer to enter into a rate lock agreement under any state law.
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