Bridge Loans

What is a bridge loan?

A bridge loan is a short-term financing option that allows you to tap into the equity of your current property to use towards the purchase of your new home. Doing this allows you to buy before selling and does not require you to meet traditional income requirements.

There are many options for bridge loans and qualifications will vary depending on your lender. JVM does not offer bridge loans directly but partners with a hard money bridge lender who originates the bridge loan, with JVM refinancing the loan after closing!

Most buyers typically prefer to sell their current property after buying their new home to avoid the hassle of moving twice and the uncertainty around finding temporary housing.

With traditional financing options, buying before selling is often not feasible since buyers need to have enough income to support two housing payments – a rare occurrence when looking to upgrade to a more expensive home. The bridge loan provides access to additional funds that are locked away in your home’s equity without the hurdles of selling and moving first.

Interest rates for bridge loans are higher than conventional loans and will often have origination fees of about 1.5 – 2 points (1 point = 1% of the total loan amount). Bridge loans are meant to be a short-term solution to help homebuyers buy before selling. The goal is to refinance the bridge loan into a conventional program within 12 months to avoid paying higher interest and enter a stable long-term loan product.

How does a bridge loan work?

Bridge loans can be confusing for some homebuyers, especially since there are so many different bridge loan products that make it easy to find conflicting information on the topic.

JVM partners with a hard money bridge loan provider, the most straightforward form of a bridge loan. Hard money providers will lend based on the total equity in your current property and will not require you to pay off any current mortgage debt until your property is sold.

After a preliminary review of your overall financial profile, a hard money lender will issue a pre-qualification letter for your new purchase. The basic information gathered in this initial review will include:

• Confirmation of the total amount of equity held in your current real estate ownings
• High-level review of your credit, assets, and any derogatory events

Once the lender is comfortable with your financials and issues the pre-qualification letter, you can place offers quickly with minimal documentation required upfront!

Bridge lenders calculate the maximum amount they can lend based on a maximum combined loan-to-value (LTV) ratio threshold between both properties, which is 65%. To calculate the maximum bridge loan amount, you will take 65% of the combined value of both homes and subtract out any current mortgages you may have. This will give you the maximum bridge loan amount available to you, with any difference between this maximum loan amount and the purchase price coming from additional funds out of pocket (as demonstrated in the example below).

Example Bridge Loan Scenario

• Departing Property Value = $1.7M
• New Property Value = $2.3M
• Combined Value of Both Properties = $4M
• Current Property Mortgage = $300K

For the Purchase

• Maximum 65% Loan-to-Value (LTV) Ratio for Both Properties: 0.65 * $4M = $2.6M
• Subtract Current Loan: $2.6M – $300K = $2.3M
• Maximum Bridge Loan = $2.3M
• New Purchase Price – Max Bridge Loan = 0 (no additional funds needed to qualify)

After the Purchase

• Old home sells for $1.4M profit
• Bridge loan is paid down with sale proceeds: $2.3M – $1.4M = $900K
• JVM refinances remaining $900K balance into a Conventional Loan

Bridge Loan Interest Rates

Interest rates may vary depending on your loan amount and financial profile. With JVM’s bridge loan partner, most loans will have interest rates in the 8-9% range, which may increase in line with shifting market rates such as the Wall Street Journal’s Prime Rate.

Bridge loans will come at the cost of around 1.5 points in origination and will usually be at least 3% higher than the going rate for conventional loans. This is another reason a bridge loan is not intended to last forever, with the end goal to convert to conventional financing via a refinance.

Pros and Cons of Bridge Loans

Pros

Fast Closing Timeline

Hard money bridge loan providers can provide much faster financing timelines than commercial banks, since they set their own standards for the loan. Owner-occupied bridge loans can typically close in about 15-17 days, with investment purchases closing even faster.

Non-Contingent Offers

To qualify for a traditional loan, most lenders will ask that you sell your home first so the current payment on the property can be excluded. In doing so, the lender will issue a contingent pre-approval, which requires that your home sells before closing on the new purchase.

In competitive markets, sellers are hesitant to consider any offers with a home sale contingency since there is too much risk in waiting for another home to be sold. In hot markets, sellers often have too many offers on the table to validate taking a risk that may jeopardize their home sale by waiting on the sale of a property that is out of their control. For this reason, buyers with these contingencies in place usually have their offers overlooked and turn to bridge financing to alleviate any seller concerns.

Lenient Approval Guidelines

Bridge lenders will primarily focus on a buyer’s existing equity for qualifying criteria since they do not need to meet “ability to repay” requirements set by the federal government. This is opposed to traditional lenders who consider income, assets, and credit to make a determination on approval. Bridge lenders will still consider your overall financial profile, but can make exceptions on a more regular basis compared to financing options with established guidelines

More Convenient Than Moving Twice

The standard process of buying a new home for those who cannot afford both monthly mortgage payments goes as follows:

1. Sell current home
2. Move into temporary housing
3. Buy new home
4. Move into your new home

Anyone who has experienced a big move understands the headache this situation presents. A bridge loan allows you to move into a new home and sell a departing residence at your own pace without moving multiple times.

Cons

Higher Interest Rates and Closing Costs

Bridge loans, like many hard money products, will come with higher interest rates than conventional loans.

Additionally, these lenders will charge roughly 1.5 – 2 points as an upfront closing cost on the loan for the origination fee. For larger loan amounts, this upfront fee can get quite large. Many lenders will allow for closing costs to be rolled into the loan amount, equity permitting.

Two Loan Payments

Until the old property is sold, buyers will need to juggle two monthly loan payments at a time. Although the bridge loan may be interest only, this additional liability can stretch the budget in the short term. On average, most buyers will refinance out of the bridge loan after 3-4 months, so on average this remains a short-term issue.

Requires Large Down Payments if Equity is Limited

If there is insufficient equity from the departing property, bridge lenders will require outside funds to make up the difference between the maximum bridge loan amount and the purchase price. For borrowers looking to upgrade to pricier homes, the bridge loan may not cover the entire purchase, requiring a significant amount of funds out of pocket.

Bridge Loan Alternatives

Sell First with a Seller Rent-Back

When you are looking to sell your home, you will be able to negotiate additional items into the contract to make an offer more appealing. One common stipulation is the seller rent-back, where you delay your move-in date and allow the seller to rent the sold property for a set period of time.

If you are looking to obtain owner-occupied financing, you can only offer a maximum rent-back period of 59 days since loan guidelines require you to occupy the property within 60 days after closing. For investment or all-cash purchases, you can negotiate a much longer rent-back period, which could give you all the comfort and time you need to find a new home to buy.

While this may put a hard deadline on your home search, this is often the cheapest and most convenient option for homeowners looking to upgrade in their move. To take advantage of this route, you can enter the process well prepared by obtaining a JVM pre-underwritten pre-approval letter before closing on your home.

A fully pre-underwritten pre-approval will ensure you’re able to offer confidently from day 1 of this 59-day period and win in competitive housing markets without the additional expense of a bridge loan.

Departing Rental Income

If you cannot qualify with both housing payments in full, you can rent your current primary residence to offset some of this liability. Suppose you can secure a signed lease agreement and proof of security deposit prior to closing on the new purchase. This rental income can help make this qualification more realistic with two monthly payments under consideration. This option does not solve the hurdle of having to move multiple times, so the bridge loan option does win in the field of convenience.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a second mortgage that allows you to tap into your current property’s equity. This option offers lower interest rates, closing costs, and a longer timespan to repay the additional loan with no 12-month limitation. Some HELOCs may include prepayment penalties for loans that are closed within a certain period of opening.

The drawback of the HELOC is that this is yet another additional monthly liability to account for, so borrowers who cannot qualify with both housing payments will not be able to utilize this. Jumbo loans can be particularly strict on newly opened HELOCs, limiting buyers from targeting the most aggressive rate options for jumbo loans.

JVM Lending does not offer HELOCs directly, but we do refer many of our clients to a local HELOC provider who has helped many of our clients open HELOCs quickly in order to offer on their dream home when it sneaks up unplanned.

Is a bridge loan right for you?

There is no one-size-fits-all for mortgage financing. The best way to determine whether a bridge loan makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.