Bridge loans can allow buyers to purchase a new home without first selling their old house. If there is a dependency on selling the old home, the buyer must make a contingency offer. Because some sellers prefer non-contingent offers, contingent buyers can be left out.
While a bridge loan offers many advantages, there are some disadvantages to be aware of, which is what we’ll discuss in this article.
Pros
- Non-Contingent Offer — A bridge loan means you don’t have to worry about first selling your primary home. Some sellers will pass on contingency offers. Having the ability to make a non-contingent offer opens the door to more opportunities.
- Faster Processing Time — Application and closing is often quicker than other loans.
- Ability To Move Quickly On An Opportunity — Similar to the first bullet point, because there’s no dependency on waiting for the primary home to sell, a buyer can make an offer as soon as an opportunity is found.
- No Payments Or Interest-Only — Depending on the lender, the bridge may not have any payments until the deal is closed. Some lenders may require interest only-payments until the deal closes.
- Focus On One Property At A Time — If your primary home must be sold before you can buy a new one, a bit of juggling must occur. You’re also focused on closing on two homes simultaneously. A bridge loan removes this juggling act and lets the buyer focus on one home at a time. The buyer can close on the new home and later focus on selling the first home.
Cons
- Restrictive Qualifications — Candidates must have excellent credit and a low debt-to-income ratio.
- Fees — There are often origination and legal fees.
- Double Closing Costs — You’ll have to pay closing costs on the bridge loan and the new home.
- High-Interest — Lenders charge higher interest because these loans have such a short lifespan. The work involved for the lender is equivalent to a comparable longer-term loan.
- Short-Term Lending Period — Terms are generally 6 months to 2 years.
- Variable Interest Rate — While some bridge loans have fixed interest rates, others can have a variable rate that may rise before the loan is paid off.
- More Expensive Than A HELOC — Bridge loans can have interest rates hitting two digits (i.e., 10%+).
- Primary Home May Not Sell — If the primary home doesn’t sell, you could end up with three mortgages — one on the primary home, one on the new home, and the bridge loan.
- Hard To Find Lenders — Bridge loan lenders can be difficult to find.
One alternative to a bridge loan is a HELOC. However, if the equity in the primary home isn’t enough to cover a down payment, then the buyer will have to use another method of financing. If the opportunity outweighs the costs, a bridge might be a good fit.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
