Bridge Loans Explained: Buy Your Next Home Before Selling Your Current One

Hey guys, welcome back to another week of Mortgage Matters in Minutes. I'm your host Brent Rasmussen, owner of Mortgage Specialists. So today we're going to talk specifically about bridge loans as over time it's been quite a few years, three or four years since we've done a video on this, but it nearly comes up every single day in conversation. And so we're going to talk about it today and what it means to get a bridge loan, what a bridge loan can do for you, and how it's impactful by the rules that the government has established moving forward. Because in this market, there's a lot of homeowners that have a house to sell and they want to move into another home, whether they upsize, downsize, right-size, whatever you want to call it. This bridge loan word gets used quite often and so we're going to talk about it today. If you've enjoyed some of our videos, hit that like button, subscribe below. Check us out each and every week for a short five to seven minute update on a specific mortgage or possibly real estate topic that would affect you buying or refinancing your home. So, let's get right into it today here and talk about first of all, what is a bridge loan? A bridge loan is basically a temporary second mortgage. Usually, you might not have a first mortgage, but it's a second mortgage product that's intended to let you borrow your equity to use that on a new property. Maybe you use it to either fix up your property, maybe you use it for your down payment on the new property, things like that. And you use that bridge loan without your house having to sell before putting in another offer in on a different house. So, why do bridge loans get conversated and talked about quite a bit? Is that bridge loans allow for convenience? They allow for you to help purchase a new property without your old one being sold. Similar to anytime you have a vehicle, you want to get rid of this vehicle and buy a new vehicle. Well, if the car lot doesn't buy your vehicle, you going and selling your vehicle yourself to someone in the market and then getting the cash to go buy your next house is inconvenience. But that's mainly why people talk about that. It also allows you to move to your new property without having to move twice. For example, like selling your house, moving to an apartment, buying another property. This bridge gaps that situation to allow you to buy a new house, move all your things into the new property, and then go back, maybe paint, fix up your old house, get it looking nice and and pretty for showings, and then come back and sell. So, it also makes it a lot less stressful of you not having to move around timing wise, not having to sell your house the same day you're buying a new house and moving all of your stuff out on the same day, which some people do do. is very challenging. Also, it puts a stronger offer to the seller saying, "Look, I can buy your house without mine not being listed for sale or mine not being sold." So, a bridge loan helps spread that gap and that situation to make those things happen. So, you want to know more about a bridge loan. How does it work? How is it structured? How is it set up? And so really what we talk about being a second mortgage is you're going to keep your first loan in place and we're going to look at the difference between what you owe and the value of the house. Okay? And we're going to use a portion of that to qualify you. So let's throw out a set of numbers here. Let's say you have a $400,000 house. Maybe you owe $200,000. That means you owe half of what the house is worth. We could look at possibly doing a loan up to $100,000 or generally up to about 80% of the house's value. So maybe $120,000 might be the most that we'd look at doing. So you would take out that $100 $120,000 and a payment comes with that 58 $800,000 whatever the interest rate is and terms that you want. What's nice is that it is an interest only payment. So it's not a large payment. you're just making the interest over a few days or a few months. So, it allows you to take that 100 grand and put it down towards the next loan to maybe put your 20% down and not have to pay mortgage insurance. So, all sounds great. We're talking through it and next thing you know, everybody today is ready to sign up for a bridge loan. But when you sell your house, you have equity and those loans get paid off first and then whatever you have left comes back with you. But here's the biggest challenge of a bridge loan is by federal law they've adjusted called the ability to repay after 2008. And ability to repay states that any mortgage professional has to prove that you have enough income to offset all of your debts. And what that means is we look at a certain debt to income ratio, usually around 40 to 50%. Meaning, if you make $10,000 of income a month, you can only afford 40 4500 to say $5,000 a month in monthly debt payments. Not balances, just payments. So, the negative that we usually see among buyers is having them qualify now for three mortgages. One, their first mortgage. two, their bridge loan payment, three, the new mortgage payment. And it's not normal that an individual with a price of goods and price of properties and real estate taxes and homeowners insurance can qualify for all three of those mortgages. If they do, that's a perfect situation for a bridge loan. We have to just make sure and look at all their liabilities, look at all of their income that we can use by the rules that are established and make sure they fit into that bucket. And so I talked to a lot of people about bridge loans, but I would say the biggest hurdle is that having enough income to qualify. So a perfect bridge loan candidate is one with high equity, high income, low debts. those are the ones that we're looking for. And while we see and talk to people here in Omaha, Nebraska that have those situations, we still have to qualify by the rules that the federal government has established. It's not our choice as lenders. These are federal laws that have been put in place that we all have to abide by. So, if we don't have an option to do a bridge loan, we can look at different things like a contingency offer, sell first moving, possibly putting up your own down payment and qualifying and coming back after and recasting. And we talk through all of these examples with clients to make sure they're aware of all the different options that are available to them because it's first of all a very stressful process. And the first thing most people come to us, they want us to make it simple and easy for them to upgrade to the next home. And that's our goal. But I would share anytime it's simple and easy, it could cost you more money than just selling your property, you know, moving somewhere else than buying a new property. But that is super inconvenience with all the things that you have in your house and everything that you have going on in your life with your jobs and your incomes. So that's why people are conversating and looking to talk about, hey, can I get a bridge loan? Can I qualify? And how do I do that? We're here anytime. Give us a call at 402-991-5153. And we will respond days, evenings, weekends, all of the above. Or check us out on our website, drop us an email, drop us a text. we respond to all of the items and all of the questions that you may have to make sure you're getting yourself educated and looking after your best interests. I'm Brent Rasmussen, owner of Mortgage Specialists, and we'll see you here next time. Have a great rest of your day. Mortgage Specialist, driven, trusted, reliable.