Bridge Financing

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Let's say you would like to "move" to a new home. You have found the perfect place but you haven't put your current home on the market. What do you do?

 

Page Topics:

  1. case study
  2. about buyer contingencies
  3. using bridge loans
  4. avoid dual mortgages
  5. use this lending checklist - rate shopper

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Case Study

You have found the perfect home

and you don't want to lose it. But you need to make an offer quick before it slips away.

Problem:
you haven't put your current home on the market. The sale price from your current home is the money you need for the down payment and closing.

So you make a "contingent" offer. Your offer is contingent upon your ability to sell your current house.

But the seller of the new home may turn down your contingent offer if they have other offers on the table.

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About Buyer Contingencies

The home buying contract is usually contingent

upon the buyer obtaining within X-days a written loan commitment from a lending institution.

The contract usually states that the buyer will make a loan application within a few days from the effective date of the contract, and that the buyer will use all diligence to obtain this loan at a reasonable interest rate and terms as defined in the contract. If the financing doesn't come through, then the contract is no longer binding.

 

If the contract is conditioned on the buyer selling their current residence,

the buyer must include this provision in the contract. The seller can either accept or reject the contingency.

Seller acceptance or rejection will depend on the market. If you are in a sellers market, it will likely be rejected if the seller is receiving multiple offers.

If you are in a buyers market, the seller may insert a time-frame in which you must sell your home.

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Using Bridge Loans

Some lenders will offer "bridge loans"

that can be used to help bridge the gap from the time you sell your existing home to the time that you are ready to buy your next home.

A bridge loan is commonly known as a short term loan that a borrower takes out against their current property to finance the purchase of a new property.

  • bridge loans are typically a short-term loan from 6 months or more
  • carries higher interest rates
  • requires up front points

    you can use the bridge loan to make the down payment and pay for closing costs

 

You can also consider other financing bridges that can help.

  • using a home equity line on your current home to use for down payment and closing costs. If you have substantial equity, the line can be used to finance your new home.

  • another option is to borrow against your 401-K plan. Lenders will allow you to use 401-K borrowings as a source of income. Again, the funds can be used for a down payment and closing.

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Avoid Dual Mortgages

Beware: you could be stuck with two mortgage payments if your existing home doesn't sell quickly.

Your best course of action is to first sell your current home prior to making an offer on another home. Other options to consider:

  • rent or lease your existing home to defray some of your lending costs
  • sell your existing home for a loss and use the proceeds to pay off your bridge loan and other gap financing

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