When current homeowners decide they’re ready to buy a new home, it can be for many reasons. They may need more space due to a growing family, or they may be empty nesters looking to downsize. Whatever the reason, many homeowners get stuck thinking they must first sell their current home in order to afford a new one. Because of this, some homeowners will make an offer on a new house with a contingency of selling first. In today’s competitive housing market, a contingent offer can often prove a deal-breaker. In this article, we’re breaking down bridge loans and how they could be the answer to filling the gap from one home to the next.
What are contingencies, and should my offer include them?
Contingencies are meant to protect buyers when making an offer on a home. They allow the opportunity to rescind an offer for particular reasons determined by the buyer. For example, a buyer may make an offer contingent on the sale of their current home. This could help them feel better about their ability to qualify for a new loan or afford a down payment.
In today’s competitive housing market, many buyers find that contingencies can make their offers less desirable. Sellers are getting so many offers that buyers are waiving contingencies to stand out from the competition. A non-contingent offer is appealing to a seller because it means there’s less of a chance the buyer will back out.
If you’re house hunting in 2022 and having trouble getting your offer accepted, you’re not alone. While making an offer without contingencies could be helpful, it’s also normal to worry about the risks of a non-contingent offer. To feel comfortable going from one home to the next, it’s important to understand your options to help bridge the gap.
What is a bridge loan?
There are two common reasons current homeowners don’t believe they can afford to buy a home until they sell their current one: 1) They don’t think they can qualify for the new home loan if it means they’ll be responsible for making payments on both their new and current homes. 2) They don’t have the money for a down payment until they sell their home. The solution to these issues could be a bridge loan.
A bridge loan is a loan on the homeowner’s current residence that allows them to access the equity in their home. For example, if your current home is valued at $500,000 and you owe $300,000, you could obtain a bridge loan for up to $100,000. The loan, however, does not need to be for the equity amount available, it could be that you only need $85k for a down payment, and a bridge loan can help make that happen.
How do I qualify for a bridge loan?
A standard bridge loan typically requires no more than a 50% debt-to-income ratio. For FHA loans, the ratio could go up to 55%. This ratio takes into account the current mortgage, short-term bridge payment, and the new mortgage.
It might be easier than you think to qualify for a bridge loan, and the best thing to do is to call your loan officer to find out what your options are. Not every lender offers bridge loans, but Directors Mortgage is glad to offer them as a solution to buyers who are feeling stuck. When working with DM, you’ll have the opportunity to obtain your bridge loan and your new home loan all in one package, which makes for a smooth and streamlined process.
Pro tip: Don’t forget that there’s typically a delay after securing a new loan and the requirement to make your first payment. Many homeowners find that they’ve already sold their home by the time their bridge loan payments are set to begin. After selling your home, you will need to pay back the bridge loan and your current home’s loan, then net the remaining funds, or consider paying down the new loan.
Ready to learn more? Reach out to a Mortgage Specialist in your community today!