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Bridge Home loan

Written By Sambasivarao on Thursday, July 18, 2013 | Thursday, July 18, 2013

Now a days home bridge loans are gaining in popularity. When a house buyer is buying another house before selling an existing house, 2 common ways to find the down payment for the move-up house is through financing either a bridge loan or / a home equity loan (or home equity line of credit).

A bridge loan is a type of short-term loan typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. It is usually called a bridging loan in the United Kingdom, also known as a "caveat loan," and also known in some applications as a swing loan.

What Are Bridge Home Loans?

Bridge Home Loans are temporary loans that bridge the gap between the sales price of a new home and a home buyer's new mortgage, in the event the buyer's home has not yet sold. The bridge loan is secured to the buyer's existing house. The funds from the bridge loan are then used as a down payment on the move-up House.

Housing Bridge Loans are specially designed to meet requirements for the interim period, between sale of an existing home & purchase of a new house.

Apart from offering regular new housing loans and house renovation loans, housing financial Companies (HFCs) offer the facility of bridge home loans too.

Consider the example given below to understand the same in a perspective.

Murali and Sindhu were living in their own home with their daughter, Meena. Since their office was in  Kamaraj Nagar, travelling to & fro daily to their respective offices was cumbersome.

Also, Child Meena was ready for her schooling stint which prompted them to contemplate moving out from their current home to the vicinity of Kamaraj Nagar.

It was through Murali’s colleague that an flat being constructed in Kamaraj Nagar was found attractive enough for investing & the 3 bedroom unit seemed good enough.

The problem seemed to be the immediate cash required for payment.

The new big flat could be bought only after they sold their existing small house.

If they waited for their house to be sold for buying the new  Kamaraj Nagar flat, they could miss the opportunity of bagging the discount price from the promoter as it was in the finishing stages; and proximity to office & school was another attractive factor.

The compulsion of arranging the immediate substantial payment to the promoter was the deciding factor for the choice of loan.

And the couple opted for a bridge home loan from a HFC.

Specially designed..!

Home bridge loans are specially designed to meet such requirements for the interim period between sale of the existing house and purchase of a new one. The HFC will lend about 80% of the value of the new property (flat).

This is useful when you do not want to take a long-term housing loan.

It gives you enough time to sell your existing house and make payment for the new home and also pay off the home loan quickly.

The loan will be sanctioned only upon entering into a formal sale agreement with the builder / promoter or Developer of the new house.

The documentation process will be similar to that of taking a loan on a new home / flat but the duration of the loan will have to be defined, which usually will be for a period of two (2) years.

What is to be noted importantly is that the interest rates for these types of Home bridge loans are costlier than the normal long term loans (5 years to 20 years) since the duration of bridge loans are shorter

Some lenders who make conforming loans exclude the bridge home loan payment for qualifying purposes. This means the borrower is qualified to buy the move-up house by adding together the existing home loan payment, if any, on the buyer's existing house to the new mortgage payment of the move up home.

The reasons many lenders qualify the buyer on two payments are because:

Most buyers have an existing first mortgage on a present house.

The property buyer will likely close the move-up home purchase before selling an existing residence.

For a short-term period, the buyer will own two houses.

If the new house mortgage is a conforming loan, lenders have more leeway to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new house mortgage is a jumbo loan, most lenders will restrict the house buyer to a 50 per cent debt-to-income ratio.

The buyer can immediately put a House on the market without restrictions.
Bridge home loans may not require monthly payments for a few months.
If the buyer has made a contingent offer to buy & the seller issues a Notice to Perform, the buyer can remove the contingency to sell & still move forward with the purchase.

 Drawbacks of Bridge Home Loans..!

* Many critics find bridge home loans to be risky, as the borrower essentially takes on a new loan with a higher interest rate and no guarantee the old property will sell within the allotted life of the bridge home loan.

* Borrowers usually does not need to pay interest in remaining months if their house is sold before the term of the bridge loan is complete. But watch out for pre - payment penalties that hit you if you pay the loan off too early.

* Make sure you do plenty of research before selling your house to see what asking prices are &  how long homes are generally listed before they’re ultimately sold.

* The real estate market may be strong enough so that you do not need a bridge loan. But if you do need one, be aware that a house could go unsold for 6 or 9 months, or longer, so negotiate terms that allow for an extension to the bridge home loan if necessary.

* Bridge loans cost more than normal home loans.

* Most bridge home loans carry an interest rate about 2 per cent above the average fixed-rate product and come with equally high closing costs.

* Buyers will be qualified by the lender to own 2 homes and many will not meet this requirement.

* Making 2 mortgage payments, plus accruing interest on a bridge home loan, could cause stress.

* If you think a bridge home loan is right for you, try to work out a deal with a single lender that provides both your bridge loan and long-term mortgage. Usually they will give you a better deal, and a safety net as opposed to going with 2 different banks or lenders.

Also keep in mind that there are other alternatives to a bridge home loan such as financing down payments with your stocks, mutual funds, fixed deposits and other assets. Remember to compare each scenario before signing bridge home loan agreement anything..!

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