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Most homebuyers who already own a home have enough equity in the
property for a down payment on the new one. It works out best, of
course, if the first home sells before the purchase of the second one.
In the event this doesn't happen, a 'bridge loan' or 'bridge
financing' is used.
A bridge loan is a loan that is made against the property that's being
sold. Sometimes called 'swing financing' or 'interim financing', a
bridge loan is usually short-term and due in about six months. In the
event the property doesn't sell before the note is due, the lender may
grant an extension, but this detail should be worked out when the loan
is made.
The lender of
the bridge loan and the lender of your new mortgage will need
assurances that you're able to handle the burden of owning two homes.
Some lenders will consider rental income on the home that's being
sold. A signed lease agreement usually serves as proof of the rental
income.
Some interim loans are interest-only, while others have deferred
payments. The interest accrues and then is paid back to the lender
when the note is paid off. As a result, monthly payments are lower,
and qualifying for the loan is a bit easier.
While a bridge loan is based on the equity in your home, most lenders
won't loan the full amount. Generally, the amount of the bridge loan
plus the balance of the mortgage cannot exceed eight percent of the
value of the property. Homeowners who have a second mortgage are often
unable to qualify for a bridge loan.
If you find yourself in a position to close on your new home before
your previous home sells, you may be able to create bridge financing
by taking both a first and second mortgage on the new home. The second
mortgage will be paid off in full when the old house sells, and you'll
keep the first mortgage long-term. The second mortgage will most
likely have a 15-year term, so you won't be under the gun to sell your
former home in six months or less. You'll need to have at least ten
percent down to work out this financing with the lender. Be sure that
the second mortgage doesn't have a prepayment penalty.
Copyright 2004
PropertySource Network |
