I have a new job across the country. Now I am facing a problem I know many people have. I have to both sell my home and buy a home. I have read about a bridge loan. How do they work?
You can finance your sale and purchase with different types of loans and one of them, the bridge loan, is easy but a little risky.
A bridge loan spans the gap between the sale of an old home and the purchase of a new one.
If you need to buy now and sell when you can, you will either need to pay two mortgages or somehow finance the period in between. A bridge loan would do that.
Lenders handle bridge loans in different ways, but here is one common way. The lender making the loan on your new house will make a short-term loan (usually six months) that pays off the old house, allows a down payment on the new house, and covers the origination charges and fees on the bridge loan itself. You are left with one loan and not in the position to support loans on two properties. The bridge loan will require you to show that you have an unconditional contract of sale on your existing home, according to the Mortgage Professor.
Some bridge loans just pile new debt onto the old mortgage. Some bridge loans will require monthly payments.
There are plenty of drawbacks. For one thing, you'll be out a chunk of money for the origination and closing costs on the bridge loan.
For another, this leaves the seller in an untenable position if the buyer drops out. In that case, the buyer might lose the old home while not being able to buy the new home.
Still, for people who must move now, some bridge loans may well be the solution.