How Does a Bridge Loan Work

Bridge loans are becoming increasingly popular because of current housing market values and the economy. Homeowners are finding themselves upside down on their mortgage, while other property values are extremely low. Jumping ship on a mortgage shouldn’t be a surprise with today’s economy, and many homeowners are taking advantage of bridge loans to help them purchase a new home. Bridge loans are used to cover the amount of a down payment that is required to qualify for a new mortgage, while the homeowner is still in the process of selling their new home. In other words, a bridge loan is a temporary loan used to purchase a new home if the homeowner’s current home hasn’t been sold yet.

Bridge loans work differently than traditional mortgage loans and refinancing loans. The approach that is taken for a bridge loan is more of an underwriting approach, instead of the usual credit rating requirements. In other words, the debt-to-income ratio doesn’t play a role with a bridge loan like it does with a traditional mortgage. This means that qualifying for a bridge loan is slightly easier than qualifying for a traditional mortgage, as long as the loan makes sense to the underwriter.

The part of a bridge loan transaction that plays a huge role with whether or not the loan makes sense deals with long term investment factors. The new home that is being purchases will be scrutinized by the lender who specializes in bridge loans. If the home is deemed worth the investment on the behalf of the lender, the bridge loan will be approved. If the new home isn’t considered worth it the bridge loan will not be approved. The value of the new home, its location, and other factors will play a role when determining if the investment is worth the bridge loan. In other words, rather than looking at the risk that the borrower may present the lender, the lender will look more at the investment value of the new home.

The reason why a bridge loan is easier to qualify for than a traditional mortgage loan is the fact that the homeowner already holds a mortgage. Owning a mortgage not only means that the homeowner has collateral, but it also means that the existing mortgage payments can be added to the bridge loan. If a homeowner has an excellent payment record on their mortgage, it will be even easier to qualify for a move-up home purchase. A bridge loan is actually a necessity, because purchasing a new home will most likely mean the new home purchase will close before the existing home closes. Bridge loans are considered a temporary type of loan in which the homeowner will actually own two homes at once. When the older home sells, the money will be used to pay the bridge loan. The homeowner will be in debt with two mortgage payments, which means it is the responsibility of the homeowner to make sure they are able to meet those payments.

One benefit that a bridge loan provides a homeowner is the fact that there is a grace period that is associated with this type of mortgage. The homeowner will have a short period of time to get their existing home sold on the market. If the new home loan is a jumbo loan, then the lender may look at the homeowner’s debt-to-income ratio. Jumbo loans are loans that surpass the limit of a traditional mortgage loan amount. This is the only time that a debt-to-income ratio is actually considered during the process of a bridge loan. Selling an old home and buying a new home never comes with perfect timing, which is why bridge loans are made available.