Five Reasons You May Need a Bridge Loan

A bridge loan is a short term loan, somewhere between six and twelve months, that helps “bridge” the gap of financing between selling an existing home and buying a new one. Like a hard money loan, it bases its value off of the existing equity in the property, and not really on the borrower.

So what type of situation would need a bridge loan? It’s more common than you might think - and it may be a valuable option if you are considering relocating quickly.

Job relocation. In this economy, a good job may be hard to find. While things are steadily improving in the employment world, something like holding property may be a setback in accepting new, better opportunities out of state or even the country. If you need to relocate for a job opportunity, you will want to secure housing quickly, even if it means your existing home is still on the market. A bridge loan can give you the finances to allow you to find a new home before your previous property has sold.

A better down payment. Let’s say you bought your first home several years ago, and have been lucky enough to have the property value grow steadily over the years. Even if you have very little in savings, the equity in your home can be used to secure enough money to put down twenty percent - or more- on your next home without selling your home first. There are several reasons a person might need to move on, even if a neighborhood is improving every day. Outgrowing the home for your family, downsizing or switching to a better school zone might all be motivation to move from your existing home to a new one.

You don’t want to be tied into the loan that long. Because traditional loans often make you commit to long-term financing, a bridge loan is a great way to make a short term commitment. The terms are often as short as six months, with an option to pay them off before or after the existing home has sold, or whenever you secure a more conventional loan.

There’s no rush on moving. If you go the route of waiting for your home to sell before buying a new one, you may have to coordinate move-in dates either very close to one another, or even possiblly find interim housing before you close on the new property, With a bridge loan, you can move into your new home over the course of several days or weeks, with no rush to be out of your previous home because it hasn’t closed or sold yet.

It can help with closing costs. Closing costs can be thousands of dollars, and motivated sellers often throw in the contingency of covering these costs for the new buyer as motivation to buy. If you are in the position where you may have to cover two closing costs, both on the sale of your existing property and your new home, a bridge loan can help cover these costs without breaking into your other assets.