A bridge loan is a provisional, short-term financing solution designed to assist homeowners in purchasing a new residence before they are able to sell their current one. This can help avoid the need to move into temporary rental accommodation between homes. These loans are secured by the homeowner’s existing property. The funds obtained from a bridge loan are used to finance the purchase of the new home into which the buyers are moving in.
Bridge loans can be particularly prevalent in buyer’s markets, where it may be easier to buy a new home than to sell an existing one. In such cases, buyers may need to secure a down payment through either a bridge loan or a home equity loan, with the latter often being less expensive.
Bridge loans can offer certain advantages to some borrowers. Moreover, many lenders may decline to issue a home equity loan on a property that is already listed for sale. It is advisable to compare the benefits of both loan types to determine which is most suitable for a buyer’s specific situation before making an offer on another property.
The approval criteria for bridge loans do not always include minimum credit scores and set debt-to-income ratios, as these can vary depending on the lender and the underwriting process. Approvals are often based on whether the underwriting makes sense to the loan officer and lender.
However, there are typically stricter guidelines for the portion of the loan related to the new home and its long-term mortgage. Some lenders may offer conforming loans and not consider the bridge loan payments when qualifying the borrower for the new mortgage.
In other instances, borrowers may qualify to purchase the new home by combining the current loan payment with the additional mortgage payment on the new property. Many lenders will qualify borrowers based on two payments for various reasons, understanding that most buyers already have a current first mortgage on their owned home and will likely close on the new home before selling their current one. Most importantly, banks recognize that home buyers in this situation will temporarily own two different houses.
Qualifying for a bridge loan based on two payments requires a higher income or a lower payment on one of the houses. With conforming loans, banks and lenders may have more flexibility with a higher debt-to-income ratio by using one of the automated mortgage underwriting programs with Freddie Mac or Fannie Mae. Generally, with jumbo loans, the restrictions are greater, and most lenders will limit the borrower to a maximum debt-to-income ratio of 50%.
