Where can you get a bridging loan?
Many lenders will offer bridging loans to homebuyers, including banks, credit unions, online mortgage brokers, and hard money lenders. However, the best place to start is with a local bank or credit union. Check with your real estate agent, as they will likely be able to recommend several local lenders who have experience with bridging loans. Homebuyers, on the other hand, should try to avoid online hard money lenders, as they usually charge the highest fees and aren’t all reputable.
What are the risks of a bridging loan?
Bridge financing is riskier for both the lender and the borrower, which is why these loans usually have such high costs. The biggest risk is that the borrower’s existing home may not sell as quickly as expected. If that were to happen, not only would the interest continue to accrue, but the buyer might also need to get an extension, which could incur additional charges.
The borrower could experience additional financial stress, as they would have two mortgages and could possibly pay off the bridge loan. If that becomes too much to bear and they can’t make any more payments, lenders could foreclose on both properties. Given these risks, homebuyers should consider all of their alternative options first.
What are the alternatives to the bridging loan?
Homebuyers have several options besides bridge financing to help them buy a new home before listing their existing home. These include:
- Take out an equity loan in the current home to fund the down payment on the next one.
- Borrow from retirement accounts, stocks, bonds or other assets to help purchase a new home.
- A hybrid mortgage product such as an 80-20 mortgage or an 80-10-10 loan. These options allow a buyer to take out a second mortgage on the new home to fund the down payment. They can either finance the entire 20% down payment on the new home or 10% plus make a 10% cash contribution so they don’t have to pay private mortgage insurance (PMI) on the new house. They then pay off the second mortgage at the closing of the sale of their existing home.
Given the costs and risks associated with interim financing, homebuyers should carefully consider all alternatives, including whether it would make more sense to move into a temporary housing situation.