Is a Bridge Loan an Option for Repeat Home Buyers?

Most buyers try to time the purchase of their next home and the sale of their current home so they can coordinate nearly simultaneous settlements, but the reality is that sometimes one end of the chain of transactions happens faster or slower than expected.

A Realtor® can help you decide whether to place your home on the market before or after you start searching for your next home, but many buyers end up needing to finance more than one home for a few days or weeks or even a few months.

Sell Your Home First?

If your budget is tight and you’re more concerned about your ability to sell your home than about finding one to buy, then it may be best to finalize the sale of your home before you make an offer on another property. The risk is that you may have to move into temporary housing in between homes, but you may be able to negotiate with your buyers to rent back your home until you can move into your next residence.

Financing Options for Repeat Buyers

If you decide to go ahead and buy a home before selling your current home, you can discuss your financial choices with a lender. Buyers with the cash for a down payment and enough income to make the payments on two homes at once may qualify for a regular mortgage on their new home, but if you lack the funds for this you may have to look into an alternative. Some possibilities include:

• Bridge loan: Bridge loans, sometimes called wrap or gap financing, are short-term temporary loans that provide financing by wrapping the payments for your current home and your next home into one loan. However, these loans are pretty rare and in order to qualify you must have excellent credit, a low debt-to-income ratio, and significant home equity. Typically you can only finance up to 80 percent of the combined value of both homes. So, if you’re selling a home for $200,000 and buying one for $350,000, you can only borrow $440,000 — and you’d have to have the other $110,000 either in home equity or a down payment or combination of the two. Once your home sells, you would pay off the bridge loan and then apply for a new mortgage, but this means you would be paying closing costs twice.
• Take cash out of your current home: If you have enough equity (at least 20 percent in your home), you may qualify for a home equity loan or line of credit that you can use to make the down payment or the initial payments on your new home’s mortgage. However, you must apply for the home equity loan before you list your current home for sale. In addition, you must be able to qualify for the payments on the home equity loan, your current home loan and your next mortgage. Another option could be a cash-out refinance in which you refinance your current home for more than the loan balance to take out the equity for a down payment. You’d have to refinance before putting your home on the market, however, and the closing costs are higher on a refinance compared to a home equity loan.
• Borrow money: If you know you’re going to sell your home for a profit, you may be able to borrow money for your down payment as long as you know you can repay the loan. You might be able to take out a personal loan from a bank, borrow from a relative or borrow from your 401(k), but before you do this, make sure you understand the consequences if your home sale doesn’t allow you to repay the loan quickly.

A lender can discuss these financial options with you, but you should also rely on your Realtor®’s market expertise to help you decide whether to sell or buy first.