Is a bridge loan right for your client?

First things first. What exactly is a bridge loan?

It’s a short-term loan to help homebuyers purchase a new home without having to wait for the sale of a current one. Sometimes, people have enough home equity that they can finance the new purchase in cash. But with a bridge loan, homebuyers use the equity they’ve built up in their current home to finance the down payment on a new one. Bridge loans can only be used towards the purchase of a new home (down payment and closing costs), therefore “bridging” the time between the departing home’s sale and the new one. Once the departing home does sell, homeowners pay off the bridge loan so that they’re left with only the new mortgage and home.

When a bridge loan makes sense

Bridge loans can make a lot of sense for some homebuyers, but not always. Is a bridge loan right for your client? Here are a couple things to keep in mind.

First, bridge loans are primarily meant for the purchase of a new primary residence. It’s harder, but not impossible, to use a bridge loan to buy a new second home or investment property. Bridge loans are also meant for people who either have the majority of their assets in their home or do not want to touch other assets.

The most common scenario for a bridge loan is one where a homebuyer doesn’t want to (or can’t) sell before buying a new home. There are many reasons why:

• Selling a home is a huge undertaking — from moving, staging, finding an interim place to stay, and of course, finding a buyer. Why not do it after purchasing the new home?
• In competitive markets with high-priced homes, most homebuyers can’t afford to carry two large mortgages. People in this position are often forced to make a contingent offer, which is far less competitive. A bridge loan enables most people (if they qualify) to make non-contingent offers.
• A homebuyer sees their dream home but their current home isn’t ready to list (needs to be staged, needs renovations, etc.).

When a bridge loan might not be ideal

A bridge loan doesn’t always make financial sense for everyone. Here are some scenarios where a bridge loan might not be the best move for your client:

• Your client wants to sell their home quickly. We need enough lead time to fully underwrite them before they can confidently put in a non-contingent offer.
• Your client does not have at least 20% equity in their home.
• Your client is looking to buy a second home or an investment property. We are unable to exclude DTI for these homebuyers, making it more difficult for them to qualify. While still theoretically possible, the buyer would have to demonstrate enough income to carry all of the debt of both loans.

How a bridge loan works

While bridge loans might sound complicated, the process is easily broken down into three distinct stages.

Stage 1: Shopping for a new home

Your client has $700k left on their current mortgage, and $300k in equity (what's already been paid off). They want to upgrade to a new home.

Stage 2: Bridge loan funds down payment

They take out a bridge loan against their current home equity, which goes towards the down payment on the new home. Another $100k from savings also goes towards the down payment.

Stage 3: Selling existing home

When they sell their existing home, the mortgage and bridge loans are paid off, and they're left with the new mortgage.

Our bridge loan process for you and your client

• Your client has a phone consultation with a Bridge Loan Expert to discuss their scenario and financial information.
• If a bridge loan makes sense for them, Better Mortgage does a full underwrite for the bridge loan and the first lien if applicable (approx. 3 business days per underwrite).
• If underwriting goes well, your client receives a fully underwritten pre-approval for the bridge loan and the first lien, if applicable. They can confidently put in a non-contingent offer on a new home.
• You, the agent, work with your client to find a new home. Once an offer is accepted on a new home, your client locks in a rate on their new mortgage loan.
• Better Mortgage completes processing of third-party orders on the new property.
• Once everything is approved, the bridge loan and new first lien are funded. Your client now owns the new home and departing residence.
• You and your client sell the departing residence. Any existing mortgages, including our bridge loan, are paid off.

Q&A with a Bridge Loan Expert

Lucy Randall,
Bridge Loan Expert

What is the bridge loan structure and term?

A bridge loan is meant to be a short-term solution to facilitate the purchase of a new property. Because of this, our bridge loan is a 12-month interest-only loan. Each month, your client will make an interest payment. At the end of the term — either 12 months or when the departing residence is sold — there is a balloon payment of the principal balance.

What are your bridge loan rates?

We have extremely competitive bridge loan rates (see chart below). We also offer a 2% discount to clients who choose Better Mortgage for both their bridge loan and their new mortgage.

We also have no lender fees on any of our loans, which makes our bridge loans much more affordable than our competitors’ products.

How are you able to qualify a borrower to carry a bridge loan and a new home mortgage?

To qualify for a new mortgage when applying for a bridge loan, most lenders will include all three loans (the existing mortgage, the bridge loan, and the new mortgage) in the debt-to-income calculation. Coupling these mortgage payments with the borrowers’ other debts often leads to a debt-to-income ratio issue and prevents most borrowers from qualifying. Instead, we offer a unique mortgage product for primary residences only. This product allows us to ignore the debt on the departing residence in the debt-to-income calculation. This means excluding the existing first lien, the new bridge loan, plus taxes, insurance and HOA dues on the existing property. This is a gamechanger, allowing clients who wouldn’t otherwise qualify to put forward a strong offer on their home.

Interested in learning more about our bridge loan program for you or your clients? We’re here to answer any questions you might have.

Contact us:

844.875.1234 • bridgeloans@better.com • better.com/with/compass-bridge