What is a Bridge Loan?

Published by Thomas Herold in Banking, Real Estate

'Bridge Loan' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A bridge loan is a temporary short term loan whose purpose is to help a home owner to afford to buy a new house before they are able to sell their present house. They might do this to avoid having to move into a rental in between houses. The home buyer’s existing house secure these loans.  The money that comes from these loans is utilized to purchase the house into which the buyers are moving.

A bridge loan can be more popular in real estate markets which favor the buyer, or a buyer’s market. The home owner may find it easier to buy a new house than to sell his or her existing one in these cases. This means that the buyers will have to come up with the down payment through either these types of loans or by using a home equity loan. Home equity loans can be less costly than bridge loans are.

A bridge loan will offer some borrowers greater advantages. Besides this, a great number of lenders will refuse to make a home equity loan on a house that is already up for sale. The best thing is to compare the advantages of the two different kinds of loan in order to decide which works best for a given buyer’s unique scenario before he or she puts in an offer on another house.

Bridge loans do not always involve credit score minimums and set debt to income ratios. It depends on the lender and the underwriting process that is involved. Instead approvals are more often granted based on whether such underwriting makes sense to the loan officer and lender. There would be stricter guidelines on the part of the loan that pertains to the new house and its long term mortgage.

There are lenders who will make conforming loans and not consider the bridge loans’ payments when qualifying the borrower for the new mortgage. In other cases the borrowers become qualified to purchase the new house by combining the present loan payment with the additional mortgage payment on the new house.

A great number of lenders will qualify the borrowers on two payments for a variety of reasons. They understand that the majority of buyers already have a current first mortgage on the home which they own. Banks also know that buyers would probably close on the new house they are buying before they sell their present home. Most importantly, banks are aware that home buyers in this scenario will own two different houses, even if for a short time frame. Qualifying on a bridge loan based on two payments requires a greater income or a lower payment on one of the houses.

With conforming loans, banks and lenders can find more room to work with a greater debt to income ratio. They can do this by using one of the automated mortgage underwriting programs with Freddie Mae or Fannie Mac. In general with jumbo loans, the restrictions are greater. The majority of lenders will limit the borrower to a maximum of 50% debt to income ratio.

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The term 'Bridge Loan' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.