If you’re looking into bridge loan pros and cons, chances are excellent you’re seriously considering using this financing option. And while this is a seemingly ideal solution to a very common conundrum, it’s not exactly without risk. But then again, there’s practically nothing in life that doesn’t have it’s upsides and downsides. This is just one more reason why it’s so important to have an experienced real estate professional to guide you when you’re ready to buy another home and sell your own. So, let’s get into the bridge loan pros and cons.
Biggest Bridge Loan Pros and Cons
A bridge loan is precisely what the name implies. It’s a debt instrument which allows a homeowner to buy another property without having to sell their current residence. Bridge loans are sought for a variety of reasons. For instance, the homeowners have already outgrown their current house and are expecting one or more children shortly. Or, a job opportunity arises which requires a relocation but within a timeframe too short to realistically sell.
Home loans come in all shapes and sizes to suit the needs of home buyers, and one type that’s definitely worth knowing if you’re trying to buy and sell a home at the same time is a bridge loan. So what is a bridge loan? As the name suggests, it’s a “bridge” that allows you to purchase new property by using the home you currently own as collateral. Also called a “wrap” or “gap financing,” bridge loans are a lifeline for homeowners who are eager to purchase new digs before they’ve sold the home they’re currently in. —Realtor.com
So, home buyers seek bridge loans to help with their particular circumstances. It’s important to note, bridge loans only fill the gap between the final sales price of a new property and the applicant buyer’s new mortgage. Therefore, to secure the financing, the applicant buyer’s existing property is required collateral. The funds given through a bridge loan become the down payment for another property. Guidelines for qualifications differ by lenders, but most don’t rely on FICO scores or even debt-to-income ratios. Here are the six biggest bridge loans pros and cons:
- Pro: Immediately list your current home. You can place your current house on the market for sale but are not encumbered if it doesn’t sell right away. Additionally, buyers have the ability to buy another property almost immediately.
- Pro: Enjoy a temporary payment hiatus. Some bridge loans do not require monthly repayments starting right away. Instead, there are bridge loan products which allow buyers to enjoy a few months without making any payments.
- Pro: Remove the selling contingency. The typical real estate purchase contract includes certain contingencies. One such contingency is having to sell in order to move forward with the purchase of another house. With a bridge loan, the buyer is able to waive this contingency.
- Con: Might cost more than an equity loan. Although a bridge loan is convenient, you’ll probably pay more for this benefit. Generally, a bridge loan is more costly than taking out a home equity loan.
- Con: More stringent lender requirements. As you might imagine, lenders are not highly risk tolerant. Because of this, bridge loans usually have more stringent approval requirements, even though credit scores aren’t usually a big factor.
- Con: Paying two mortgages simultaneously. Of course, if you do obtain a bridge loan, you’ll pay two mortgages simultaneously. Plus, the interest will continue to accrue on the bridge loan.
If you are in the market to buy or sell a home and want to know more about the process, give us a call at 407-616-7286. We’ll help you house hunt and find a property which best suits your wants and needs. We serve all of Orlando and can help you navigate the process.