Ideally, homeowners who are looking to move would like to sell their old home before purchasing a new one. This way, the proceeds from the sale can give them the money they need to finance their new home. Unfortunately, this does not always work out. At times, home buyers may find their new home and need to purchase it before their old home is sold.
Bridge loans, also known as gap financing or swing loans, are temporary loans used to help buyers secure the purchase of a new home until they can sell their existing home. Borrowers of bridge loans will use the proceeds from the sale of their home to repay the bridge loan once it is sold.
Swing loans are not the only choice available to borrowers that are in the midst of selling their home while shopping for a new one. Another option is a home equity loan or line of credit. These loans are typically less expensive than swing loans, but often provide less benefits to buyers. There are many lenders who do not allow home equity lines of credit for properties on the market.
Most of the time, there are no set of guidelines for bridge loans in place for borrowers regarding debt-to-income ratio or credit score. Alternatively, the requirements are framed by common sense underwriting. Sometimes lenders will exclude the gap financing payment, so you can qualify for a loan. This means that borrowers can purchase their homes by adding the existing payment on the existing mortgage, and the new payment on their new home.
Buyers will need to qualify for both payments, since most buyers have existing mortgages. For a short period of time, the buyer will own two properties since the purchase of the new home will likely close before their old home is sold. In most instances, swing loans come with due-and-payable dates determined by the lender, usually being six months. If the borrower has not sold their old home within six months, an extension is usually granted, but may come with additional fees.
Fees involved in obtaining a bridge loan include administrative fees, appraisal costs, escrow fees, title policy fees, recording fees, notary fees, and origination fees. Bridge loans are usually about 2% higher than the interest rates on a typical 30-year fixed-rate home loan. Lenders can also charge higher fees on swing loans, often over 1% of the amount owed on the loan. There may be no payments for a stipulated amount of time, but interest will still accrue on the loan, and will be due at the end of the loan term.