| With homes in short supply, you’re not alone in feeling compelled to get your offer accepted on a new home as quickly as possible. What if you could qualify for the loan on the new property prior to the sale of your current home? Eliminating the hurdle of a contingent offer could increase the likelihood of your offer being accepted.
Enter the bridge loan, a niche product offered by Fairway Independent Mortgage allowing a buyer to use the equity from their existing home as down payment for a new home BEFORE selling the current property. Fairway is uniquely positioned to offer competitive rates on a true bridge loan product.
These two-part loans relieve the pressure of contingent offers, ensure time to stage and sell the current home maximizing the sales price, and allow for a single move with no rent back under a flexible time frame.
The Pros
- Qualify for a new home BEFORE closing on the sale of the current home – Prior to the sale of the home the buyer is departing from, the lender places a lien on the property as collateral. The lien secures the equity that would have been a down payment if the home was already sold.
- Use a rent estimate to improve qualifying criteria – Underwriting guidelines for a bridge loan allow a rent estimate to offset expenses on the departing residence for qualifying purposes on the new property. These include the mortgage payment, taxes, insurance and HOA associated with the current home. The net financial result, the buyer is qualifying for only the new loan payment. No formal rental agreement is required to exercise this option.
- Flexible proceed options – When the home sells, the existing mortgage is paid off, the lien that had been securing the down payment is paid in full, and any proceeds remaining can be retained by the seller or used to further reduce the principal balance on the new loan.
- Competitive rates – Bridge loans through Fairway do not command a premium and are available at very competitive rates.
- Re-amortization option – When the current residence is sold, the seller can choose to add to the required down payment and the new lower balance can be re-amortized to reflect the additional principal paydown resulting in a lower monthly payment.
The Cons
- Longer lead time – Fairway guarantees a 30-day close with most loans closing in 20-30 days (or less if we need a rush). Our experienced team of in-house underwriters is how we make this happen. Bridge loans have different guidelines for compliance and are only underwritten directly by the investor, not our in-house crew. We maintain strong relationships and have a reputation for submitting well qualified borrowers, but we are subject to their underwriting turn times on bridge loans. Just a heads up, these consistently average (regardless of how much we push) around 40 days.
- Higher closing costs – Closing costs on bridge loans run approximately 1% higher than most loans and require an additional appraisal as both the new home and the departing residence must be appraised. Like most other loan programs these closing costs may be paid by a seller concession if negotiated into the offer price.
- Equity position – In general, bridge loans require at least a 25% to 30% equity position in the current home depending on the value of the destination property. A quick calculation can determine exactly how much equity is needed for a bridge loan to be a viable option.
The Pros Outweigh the Cons
The combined advantages of being able to make a strong offer on a new property, while having the time needed to sell the departing residence in a manner that maximizes sales price, usually more than offsets any additional costs and makes bridge loans a winning strategy in our low inventory market.
If a home purchase is on your radar and you’d like some flexibility in selling your current home, reach out and let’s see if a bridge loan could be right for you.
by Steve Landis for The Landis Group |
