Bridge Financing

Sometimes, either by choice or for reasons out of your control, you find yourself trying to buy a new house before you sell the one you are living in.

This poses two potential challenges; 1) Can you qualify for both home loans? and 2) what is the source of the down payment for the new home loan? Let’s take them one at a time. Qualifying for two mortgage payments can be a challenge but in recent years has become more commonplace.  If you have decent credit, your debt to income ratio can be pushed much higher than was previously possible; see criteria for qualifying for a loan.

Another popular way of qualifying is by doing a stated income loan. This may or may not work for your situation.  Call Family Mortgage for a consultation to see if this strategy makes sense for you. The second challenge is the down payment. Let’s start with an example. Let’s assume that Jack and Sue are selling their home for $250,000 but it is not on the market yet. They just found a home that they desperately want but they need to move quickly or they will lose it. It is on the market for $325,000. The house in which they currently live has a loan balance of $195,000, so let’s assume that after the costs of selling the home that they “net” $35,000. They have no money set aside in cash for a down payment outside of the money they will get after selling their existing home.

This is where a “bridge loan” comes into play.. A bridge loan is one in which the lender will loan you up to 80% of the value of your existing home (combination of your existing first mortgage plus the new bridge loan divided by the appraised value of your home does not exceed 80%) and will only count the new home loan payment towards your debt ratio when qualifying for the new mortgage. In Jack ands Sue’s case, they do not have that much equity in their new home…so what are their options? We recommend the following: apply immediately for a no closing cost home equity line of credit on your existing home to get enough money to make a 10% down payment on the new house.

This must be done prior to listing your home for sale. In Jack and Sue’s case, they could get the required $32,500 necessary (10% of $325,000) from their existing home. We then try to qualify them for a new loan as a 80/10/10 to avoid paying mortgage insurance, which would be secured by the new home. Once the house in which they live sells, the home equity line gets paid off. It seems like a lot to endure, but it is a viable strategy and it is by far the most cost effective way of structuring the scenario to keep your upfront costs to a minimum and to get the best possible interest rate on your new home loan.