Are you somewhat familiar with information about bridge loans, but you want to know more about alternatives to bridge financing? Are you currently in the market to buy a new home, but you still need to sell your old one?
Whether it is to move closer to work or to a whole different state to be closer to family, buying a new home is an exciting yet stressful situation. When you need to purchase a home while you are living in one, you need financial flexibility.
If this sounds like what you might be going through, then we curated this article just for you. This brief guide will cover important information for homeowners and who you can reach out to for more help!
What Is a Bridge Loan?
A bridge is a sum of money that a bank provides to cover the period between two different transactions. For example, bridge loans are outstanding if you are in the process of buying a new home and selling your old one.
These loans are “secured,” meaning that you will need to put up collateral to protect the lender’s interest. This loan “bridges” the period when someone owns a new home and sells their old one.
How Does a Bridge Loan Work?
You can apply for your bridge loan through the lender underwriting your new home purchase as soon as you have a sale date on your existing home. The amount of your loan cannot exceed the equity value of your existing property.
Before you receive your loan proceeds, you will need to have your real estate lawyer present. Your lawyer will need to sign an Assignment of Proceeds of Sale. This document is an agreement that you will repay the bridge loan as soon as you close on your current home.
Bridge Loan Qualifications
As stated earlier, you will need to ensure that you have a firm closing date on the sale of your home before you can apply for a bridge loan. This means that you need a signed contract from a confirmed homebuyer.
If your current mortgage provider does not offer bridge financing, you will need to reach out to a private lender. Many banks do not offer bridge loans because of the risks involved.
There are a few banks that provide bridge loans without a sale agreement, but it is at a cost. A bridge loan without an agreement will most likely carry a higher interest rate.
Before applying for your bridge loan, make sure that you have a recent copy of your current home’s mortgage statement. This statement will help your lender know how much equity you have in your home once the sale of your property closes. Your bridge loan amount will most likely be equal to the down payment of your new home minus any deposits already made.
Bridge Loan Advantages
Bridge loans are outstanding, especially in a seller’s market. Bridge loans for new home purchases give you access to quick capital to help finance a faster close on your new home. Overall, a bridge loan is very flexible for those who are looking to buy a new home.
Bridge Loan Disadvantages
One of the biggest cons of a bridge loan is the interest rate. Your interest rate can and will fluctuate at any given moment. Your rate can also change at any point without any notice to you.
Credit Score
If you have a low credit score, you may not qualify for a bridge loan. Most applicants accepted have a credit score of at least 800. Anything below an 800 may result in a denial. These applicants also have a very low debt to income ratio.
Second Mortgage
You will essentially pay on a second mortgage with an additional interest rate if you receive an approval. You must be able to prove that you have sufficient income to cover your monthly payments for your bridge loan and your new mortgage.
Catch-22
There isn’t a prepayment penalty with most loans, but that is not the case with your bridge loan. Depending on your lender, you may face a prepayment penalty if you try to pay off your loan faster.
Smaller Repayment Timeline
Bridge loans, unlike other home loan alternatives, only last for about a year. These loans are a short-term financial solution, and you will need to start repaying the loan at the end of the year.
Bridge Loan Interest Rates
Bridge loans are very expensive because of the risks involved. Lenders have to consider the risk of your old home not selling within a timely manner and you defaulting on the loan.
Interest rates for bridge loans are usually between 6% to 10%. The fees are also quick pricey. You can expect to pay about 1.5% to 3% of the loan.
Bridge Loan or Home Equity Loan
You can use a few other alternatives to bridge financing, such as a home equity loan. A home equity loan is a secured loan that also uses your current home as collateral.
These loans allow you to borrow against the equity in your home. The repayment periods are between five to twenty years, and their interest rates are more favorable than bridge loans.
You can use your home equity loan to help finance the down payment for your new home, but that may be a risk you don’t want to take. For example, if your current home fails to sell, you will have to pay back three different loans.
Alternatives to Bridge Financing
As mentioned earlier, a home equity loan is an alternative available to you. A home equity loan, also known as a HELOC, is a line of credit borrowed against the equity of your house.
With a HELOC, you only need to pay the interest amount each month, giving you the flexibility to use as least or as much as you want. If approved, a lender will send you a credit card containing the amount you received approval for.
Personal Loan
If you have a stable job, finances in order, and a good credit score, you may want to opt for a personal loan. Some lenders can offer you a decent-sized personal loan with low-interest rates and fees. If your credit score is not where it should be, you may still receive a personal loan, but with added fees and higher interest rates.
80-10-10 Loan
An 80-10-10 loan, also known as a piggyback loan, allows you to get a mortgage that covers 80% of your home’s purchase. You will then piggyback on that home’s mortgage with a second loan for 10% of that home’s purchase price.
The last 10% represents the 10% that you have to put down as a down payment. Once your old house sells, you can use the proceeds from that sale to pay down your second mortgage.
This mortgage is a loan where your first and second mortgage loans are obtained at the same time. An 80-10-10 mortgage is best when house prices are high.
Benefits of an 80-10-10 Loan
Your second mortgage acts like a credit card with a lower interest rate. You have a lower interest rate because the equity in the home backs the loan. You will only incur interest when you use this line of credit.
This means that you can pay off the home equity loan in full to eliminate any interest payments.
This loan is a good option for those who want to buy a home but have not sold their home just yet. In that case, a borrower would pay off the HELOC when their current home sells.
Cons of 80-10-10 Loans
There are a few disadvantages of 80-10-10 loans that you will need to consider. For example, these loans may have a higher interest rate. There are also additional closing costs and fees that you will need to pay to close on this loan.
If you do not have good credit, you may not qualify for this loan. Make sure to review your debt to income ratio and your credit score before you apply.
Selling Your Home
If you don’t like the idea of obtaining different loans and running the risk of adding more debt than you need, you can sell your home. Although selling your home may sound like a daunting idea, you have options. For example, you can either sell your home traditionally on the market, or you can reach out to an iBuyer.
Interested in your home’s current market value? Receive a free online home value estimate!
What Is an iBuyer?
An iBuyer is a real estate company with considerable financial resources and cutting-edge technology. They use this technology to “instantly” give you an all-cash offer on your home based on the information gathered through AI.
Selling to an iBuyer
If you decide that you want to sell your home to an iBuyer, there are a few things you will want to gather. Make sure that you collect as much information about your home and take photos of the home’s current condition. Once you have that all together, you can start your application process.
Request Your All-Cash Offer
Once you pick your iBuyer, you will request an offer from them. The iBuyer will have you fill out an application with information about your home. They will also need your best contact information so they can send you the information about your offer.
Accept or Decline the Offer
If your home meets the iBuyer’s criteria, they will reach out to you within 24 to 48 hours. You will have five days to either accept or decline the offer. As mentioned earlier, the offer letter will include any fees and your estimated net proceeds.
Accept and Schedule an Inspection
Once you accept the loan, the iBuyer will request an inspection. This inspection is free, so you do not need to worry about paying for an inspection.
The iBuyer wants to inspect your home to ensure that your home matches the information you input. If the iBuyer finds that your home needs a few repairs, they will let you know. They will deduct the repair costs from your net proceeds, and they will handle the repairs when you move out.
Choose Your Closing Day
With repairs out of the way, you get to move on to pick your closing day. You have the power to choose whether you want to move out in two days, two weeks, or two months. Most iBuyers give you up to 60 days to close on your loan.
Close and Move On
Once you pick your closing day, you get to focus on your next adventure. After you close on your home, you will receive a payment within a few days.
There is no need to worry about showing your home or preparing it for homebuyer appraisals. The iBuyer takes full responsibility for your home. They will handle staging, showing, and selling the house while you move on to your next home.
Where Do iBuyers Buy Homes?
There are many different locations that iBuyers buy their homes from. Before you choose your iBuyer, make sure that they can purchase your home in your state. They should have a section on their website that tells you where they do and do not buy houses.
Sell Your Home Today
Although there are several different alternatives to bridge financing, they come with additional fees and debt. If you are not looking to risk putting more debt on the line or your old home on the loan, you may want to consider selling your home.
You have the option to sell your home on the market on your own, or you can receive help from an iBuyer. If you want more control over the sale of your home, create a seller account now. We have the proper resources and excellent customer service to make sure that you understand the iBuyer process.
