There may be a point when, if you're selling and then buying a home, and you're stressing out the logistics, you might wonder if you should get a bridge loan.
A bridge loan is a short-term loan used in both commercial and residential real estate. Homebuyers sometimes take out bridge loans, which will give them the money to help them buy a home, before they sell their current house. That can make the process go more smoothly. You move into a home -- and then you're out and can focus on selling the old one. But if things go badly, the process may end up being almost as much fun as falling off a bridge.
How a bridge loan works. A bridge loan, which you typically get through your bank or a mortgage lender, can be structured in different ways, but generally the money will be used to pay off your old home's mortgage. You might be required to make monthly payments on the bridge loan, or you might have to pay upfront or back-end lump-sum interest payments. Your bridge loan might last only a few months or as long as a year.
If you're looking to visualize what a bridge loan might look like and how it might be used, consider this example. If your existing home is worth $200,000 and you still owe $100,000 on it, and you're going to buy a $300,000 home, you might take out a $135,000 bridge loan. A hundred grand would pay off the old house's lien, while $5,000 hypothetically could cover the closing costs, origination charges and fees. Then you'd have $30,000 to go toward the new house's down payment, closing costs and fees.
So you move into your new home, and you start paying a monthly mortgage payment, and you may also start paying a bridge loan payment, although sometimes you have a few months before you need to start paying anything. It's during that time that -- if we continue with our hypothetical example -- you would hopefully sell off your old house for $200,000 so you could pay off the $135,000 bridge loan, plus its accruing interest. Then you would pocket the money left over.
Because you're only borrowing money for a short time, lenders won't make as much money from your bridge loan, and so the interest rates tend to be higher than a conventional mortgage loan.
Bridge loans are rare. If you're starting to think a bridge loan is for you, your odds of getting one are probably pretty slim.
Michael Chadwick, a certified financial planner who owns Chadwick Financial Advisors in Unionville, Connecticut, says, "We don't recommend them. Today most people use home equity lines of credit as the tool to get from house to house."
Then again, in terms of whether they're recommended, and if they're primed for a comeback, it depends whom you talk to. John Walsh, CEO of Total Mortgage in Milford, Connecticut, says that while bridge loans are rare, "as the housing market gets better, this product becomes more viable. It's a great product in the right situation for someone building a house. I can see this product being offered on a more regular basis as the housing market and the economy continue to prosper."
Bridge loans can be risky. You saw a lot more bridge loans occurring in the lead up to the housing crisis of 2007 and 2008, says Richard Muskus, president and chief lending officer of Patriot Bank, a community bank headquartered in Stamford, Connecticut.
"They're much more difficult to do today," Muskus says, adding that there is a place for them. But because of the risk involved, lenders are much more careful than they used to be when it comes to approving them.
"The primary risk is that when you're buying a new home and selling your old one, you need to understand the strength of the financing sources of the person buying your house," he says. "If that falls apart, the bridge collapses."
Muskus has seen families take out bridge loans, only to later struggle because a buyer had trouble at the last minute with the financing of the home. He remembers one family about seven years ago who applied for bridge financing. They bought a new home in another state and just before the closing, their buyer's financing fell through.
"They now owned two different homes in two different states," Muskus says, adding that the family worked it out and was able to pay the bridge loan before the money became due, but only by selling their old home at a much lower price than they had planned.
Even the rich and famous have struggled with bridge loans. Johnny Depp sued his business managers earlier this year, claiming that they didn't pay back a $5 million bridge loan that led to foreclosure proceedings on his house in Hollywood Hills in Los Angeles. And President Donald Trump's former campaign manager Paul Manafort has been in hot water with federal investigators who have subpoenaed records related to a $3.5 million bridge loan that allegedly wasn't filed correctly. Manafort's company also, according to reports, apparently didn't pay $36,000 in taxes that was due on the loan.
It may not be too surprising that people sometimes have trouble with these loans. They're complicated.
"Bridge loans have a lot of tentacles," Muskus says.
How to know if you might want to apply for a bridge loan. Obviously, you need stellar credit. But beyond that, "a favorable candidate for a bridge loan is typically a person that has had a substantial and sustainable increase to personal income and has found, or is building, a new home prior to selling their existing residence," says Michael Goldrick, executive vice president and chief lending officer at PCSB Bank, headquartered in Yorktown Heights, New York.
Goldrick adds: "Another favorable candidate is a long-term homeowner with modest leverage and satisfactory income that is downsizing. The bridge loan can be utilized to secure the purchase of the new residence and can then be repaid upon the sale of the existing home."
How to know if you shouldn't apply for a bridge loan. Goldrick has some thoughts on the matter.
"Homeowners who should not consider bridge loans are individuals with weak credit, high leverage and unsatisfactory income levels to carry multiple mortgages for any term longer than six to 12 months," he says.
But you probably don't need an expert to tell you that. If you're not a good candidate for a bridge loan, you've probably already figured that out firsthand.
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