Bridge Loan vs. Home Equity Line of Credit

Bridge Loans vs. Home Equity Line of Credit-150x150You’ve decided to move to a new home and you are ready to make an offer. Unfortunately, you need to sell your old home in order to be able to buy the new one. You won’t be able to pay for a new mortgage loan before selling your current home, so you basically have only two options: a bridge loan or a home equity line of credit (HELOC).

Both the bridge loan and the home equity line of credit have advantages and disadvantages. It depends on your individual financial standing if one or the other is right for you. Before deciding on which one to choose, let’s go through a few of their advantages.

Advantages of a Bridge Loan

Bridge loans are short-term loans that you can get in order to pay the down payment on your new home. Lenders are always happy to help you with a bridge loan, if you qualify. The amount of the loan is usually small, around 3 percent of the purchase price. Here are the advantages that you will have if you choose to take out a bridge loan:

  • The bridge loan can be borrowed against the equity in your old home. This is possible while the house is listed, unlike with the home equity line of credit, where the financing must be set up before listing your current home.
  • Not required to make any monthly payments until your current home is sold. This is unlike you would on a home equity line of credit. The balance on the bridge loan, as well as the interest, is paid at the time the old house is sold.

Advantages of a Home Equity Line of Credit (HELOC)

The home equity line of credit is a type of loan where the collateral is the equity in your home. What makes the HELOC different from a conventional mortgage loan is the fact that you are not given the entire borrowed amount up front. After a maximum balance is established, you may borrow amounts up to the maximum, like you would with a credit card. Here are the advantages that the home equity line of credit has:

  • The interest rate and fees are lower than on a bridge loan. The downside, as we mentioned earlier, is that you must take out a home equity line of credit before listing your current home for sale. This means that you should plan ahead if you want to use this type of financing.
  • With this type of loan you also have access to funds in the future, without reapplying. These funds can be used for home improvements or repairs, and other recurring expenses.

At first glance, it seems that the home equity line of credit is the cheapest option when it comes to short-term financing. In the end, your personal finances are the most important factor in determining if a bridge loan or a home equity line of credit is the right choice for you.

How to Make a Down Payment and Mortgage on a New Home When Your Current Home Hasn’t Sold

How to Make a Down Payment and Mortgage When...-150x150Whether you have to relocate because of your job, or you just found your dream home, qualifying for a mortgage loan if your old house is still on the market will be difficult. Most likely, carrying two mortgages is out of the question, so you are looking for ways to buy that new home before selling the old one. This wasn’t an issue in the past, but the financial and housing crisis has made it very hard for the average home buyer to receive a mortgage loan in this situation.

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Before the Mortgage Crisis

Being approved for a new mortgage loan before you sold your old home wasn’t very difficult in the past, before the mortgage crisis. The process was as simple as finding a tenant and getting a rental agreement, and then the new lender would credit you with the rent income to compensate for the mortgage payment.

Companies that advocate strategic default have started to encourage buyers to abandon the old home and mortgage as soon as they found a new home and someone to rent the old one. This way they can avoid the negative effect that a foreclosure would have on finding a new home. This has made it a lot tougher for legitimate home buyers to be able to obtain a new mortgage loan in this situation.

Getting a Mortgage Loan Before Selling Your Old Home

Nowadays, requirements for getting approved for a new loan when you haven’t sold your old house have gotten much stricter. Freddie Mac, Fannie Mae, and the Federal Housing Administration (FHA) have made it a lot tougher to borrow money, in order to protect the lenders from people who would take advantage by walking away from their old home.

Federal Housing Administration (FHA) loans can still be given, even if you haven’t sold your old home yet, but there are a few strict qualifications:

  • New job or job transfer to a different location. Having to relocate because you found a new job or you were transferred from your old one and the commute is impractical from your current home.
  • Divorce. You are currently going through a divorce and are buying a new home.
  • Family size. You family’s size has increased so much that there is no longer enough room in your current home to accommodate all the members of your family.

In addition to that, it is required by the FHA that you pay the mortgage balance down to 75 percent of your home’s appraised value before you will be able to close on the new home.

Fannie Mae and Freddie Mac require that, in case your old home isn’t sold yet, but it is in escrow, you must have a reserve fund equal to the payments for 6 months, including property taxes and insurance, and you must bring a valid purchase contract. In case your old home is converted to a rental, you must provide a lease agreement, a copy of the check for the security deposit, and proof that the check was deposited. In order to qualify to use your rent income for the purchase of your new home you must have over 30 percent equity in your old home.

As you can see, buying a new home when your current home hasn’t sold is possible, but you will have to meet certain strict requirements. The best option would be to plan your move ahead, giving you enough time to sell your old home and also saving you a lot of headaches and hassle.

 

What is a Bridge Loan?

What is a Bridge Loan-150x150Also known as a swing loan, or interim financing, a bridge loan is a type of very short-term loan that is normally given out to an individual or a business until they can secure permanent financing. Bridge loans are commonly used in the housing market, and are generally used by home buyers who are buying a new home when their old home is still for sale. Bridge loans feature fairly high interest rates and must be backed by collateral, such as your home.

When you use a bridge loan to purchase a new home, but your old home is still on the market, the current home is used as collateral, and the funds from the bridge loan are generally used as a down payment towards your new home. In this case, the bridge loan will be repaid when the old home is sold.

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Advantages and Disadvantages of a Bridge Loan

When looking for a new home either to live in, or just for a short-term investment, you will most likely need a loan. Unfortunately, securing a conventional loan will take you a lot of time and will require you to respect some strict mortgage loan qualification requirements. Another problem you might face is that, if you plan on buying a new house while your current house hasn’t sold yet, you will most likely be denied a conventional loan, because you will be considered a higher risk for default. Your best choice in this situation is to take out a bridge loan, which features a few distinct advantages over conventional loans. Here are the most important ones:

  • Bridge loans are short-term loans. Most conventional loans are designed for people who want to pay for a mortgage or college tuition, and require you to pay the loan off over a long period of time. A long-term loan will increase your risk of suffering some kind of financial issue. Bridge loans, on the other hand, are designed to be paid off in full before you receive the long-term loan for your new home.
  • The option to choose when to repay the bridge loan. Bridge loans can be repaid before you receive the long-term mortgage loan needed to buy a new home, or after receiving this loan. If you repay the bridge loan in full and on time before you receive the new loan, you will significantly increase your credit score, allowing you to qualify for more mortgage loan options.
  • No set qualification guidelines. Bridge loans don’t come with any set limits or qualification guidelines, like a conventional loan would have. Bridge loans can also be turned into regular mortgages by the lender.

Of course, like any loan, bridge loans come with advantages and disadvantages. Here is what you should keep in mind before applying for a bridge loan:

  • Larger payments and penalties. Being short-term is an advantage that bridge loans have, but this may also be regarded as a disadvantage. Repaying the loan in a short period of time means that the monthly payments will be larger than with a conventional loan. Lenders are also stricter when it comes to late or missed monthly payments on a bridge loan. The fees and penalties are larger for a missed payment on a bridge loan than for missed payments on a conventional loan.
  • Dependent on more permanent financing. You may rely on the mortgage loan that you are applying for in the near future to repay the bridge loan, but there are no guarantees that you will receive that loan. In case not everything goes as planned, you will have to repay the bridge loan from your own pocket. Another choice would be to take out a new loan in order to pay the bridge loan, but that could lower your credit score, create new debt for you, and ultimately make it harder for you to receive financing for a new home.

Before deciding on a bridge loan, make sure that you understand what your rights and responsibilities are, and carefully weigh in on both the advantages and the disadvantages of this type of loan. Your financial situation is the most important factor to be taken into consideration before deciding which path to take.