Guide to Bridge Loans

You’ve found the perfect home, negotiated a purchase agreement, and are eager to close, but there’s just one problem. You haven’t yet sold your current home. What can you do? Will you lose out on your new home if you can’t sell your old one fast enough? Not necessarily.  

There are many reasons a homebuyer might not be able to sell their current home before buying a new one. If you find yourself in that situation, you may still be able to get your new home to close by using a bridge loan. In this article, we will explain what a bridge loan is, how it works, and some other options that could serve a similar purpose for some borrowers.

What is a Bridge Loan?

Bridge loans are a type of financing that can be helpful if you are moving out of a home you own into a new one but haven’t yet sold the old home. These loans can help borrowers afford a down payment on the new home, for example, and then, once their old home sells, they can pay off the bridge loan with the profit from the sale.  

Bridge loans are secured by your current home, and they will take a second lien position or better. It’s important to note that there is some risk when taking out a bridge loan because it is secured against that property and is ultimately more debt you will need to pay down. However, the idea behind this loan is generally that it would be paid off using money from your home sale.

How Bridge Loans Work

Every lender is likely to have their own distinct bridge loan product with different structures and requirements. Speaking specifically to the bridge loan product offered by The Federal Savings Bank, our bridge loan is a 1/1 adjustable-rate mortgage (ARM). This means that the interest rate is fixed for the first year of the loan, but for the remaining 29 years of the loan term, the interest rate will adjust every 12 months.  

Under ideal circumstances, the borrower would be able to pay off the bridge loan before the adjustment period begins. Our maximum loan amount for a bridge loan is $250,000, though not every borrower will need that amount or qualify for it.  

Additionally, to get a bridge loan from The Federal Savings Bank, the departing residence must currently be listed for sale, and the bridge loan must be used in conjunction with a purchase mortgage.  

Once you close on your bridge loan, you will receive your cash in a lump sum. Then, you would be able to use that cash on, for example, the down payment for your new home while you wait for your current home to sell.

When to Consider a Bridge Loan

Of course, every borrower’s situation and needs are unique to them, but there are two common scenarios in which a bridge loan might make sense. We’ve discussed the first, in which you need to buy a home before you’re able to sell yours. That may be because your home has been slow to close, or perhaps you very suddenly needed to move for work or life reasons.  

Another common use case for bridge loans from some lenders is flipping a property to sell. Borrowers would, in this case, take out the loan against their current home, renovate the new property, then sell it.  

However, it’s important to note that for our bridge loan in particular, your current residence must be listed as for sale. If you are intending to buy an investment property using financing from The Federal Savings Bank, you may need to consider a different loan option.

Requirements for a Bridge Loan

Again, every lender will have their own unique requirements for their bridge loan products. Our requirements include, but are not limited to: 

• A minimum of 680 FICO® score 

• Up to 45% debt-to-income ratio with three months reserves in a checking account through our bank, or 50% with six months reserves and a 700 FICO® score 

• Employment verification or 30 days of paystubs with two years of W2s 

Mortgage insurance is not required for our bridge loan product. Overall, it’s very important to talk to your lender to determine their requirements and whether or not you would meet them.

Possible Bridge Loan Alternatives

You may find that a bridge loan isn’t the best option for your needs, but you might still need financing. In that case, you should talk to your lender about possible alternatives. Some that might be a good fit include the following.  

Investment Portfolio Loan

As alluded to earlier, if you are hoping to purchase an investment property, and you’d like to work with our bank, then you might be better served by our investment portfolio loan. This product has a higher max loan amount that goes up the conforming loan limit or up to $50,000 over the high balance county limit, depending on where you’re buying.  

You may potentially be allowed to hold the title to the home in your LLC if you have 100% individual ownership of the LLC, which can be useful for investors. Like our bridge loan product, our investment property loan is an ARM. However, its first rate adjustment doesn’t come for 62 months. 

Home Equity Loan (HELOAN)

Home equity loans are another second lien loan product in which you borrow against the equity you’ve built in your home. This does come with the risk of losing your home, as the loan is secured by your home. However, a home equity loan can be a good way to get funds for a down payment if you are eligible and if suited to your financial situation. Our HELOAN limits are $50,000 at minimum and $500,000 at maximum. 

Home Equity Line of Credit (HELOC)

Our HELOC can be a first or second lien loan product. It has the same loan limits as the HELOAN, however, instead of receiving all of the money in one lump sum, a HELOC gives you a revolving line of credit to borrow from as needed during the draw period. During the draw period, the borrower would only need to make payments on interest. Then, they would pay both principal and interest for the remainder of the repayment period.  

This option carries similar risk to the HELOAN, as it is secured against your home. So, with this option, and all other loan options, be sure to make frank assessments of your financial situation and speak with your lender about what might make the most sense for your needs.

Final Thoughts 

A bridge loan can help you cover the gap between selling your current home and buying your new one. As with any loan product, it comes with unique benefits, drawbacks, and requirements, which you should discuss thoroughly with your lender. Still, if you need to buy a home before yours can sell, a bridge loan could potentially keep you on track.  

DISCLAIMER: Subject to credit approval. Terms and conditions may apply. Property insurance is required. A HELOC is a revolving line of credit secured by your home. Borrowers can draw upon the credit as needed during the Draw Period and are only required to pay interest on the amount borrowed. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation. Closed-end second mortgages, home equity loans, and cash-out refinance loans are not a revolving line of credit like HELOCs, and typically provide a single, lump-sum payment at closing that is repaid with a fixed rate in regular installments over a set term, similar to a traditional mortgage.