You’ve found the perfect place to settle down, build a life, and perhaps even raise a family. It could be that modern-style home with the two-car garage, or maybe it’s a nice cottage overlooking the countryside. Your real estate agent tells you the property is highly sought after, so you want to make an offer and complete the purchase as soon as possible.
Even if you’re already in the process of selling your current house, you know it won’t close in time to give you access to the money you need to pay the necessary down payment. However, this is your dream house, and you’re set on owning it.
You express this to your real estate agent, and they offer a solution — apply for a bridge loan.
What Are Bridge Loans and How Do They Work?
When you need financial assistance bridging the gap between the time you buy your new home and when you sell your previous property, you’ll likely require a bridge loan. A bridge loan provides you with the needed funds between property sales.
It is a short-term loan that usually lasts between six months and a year, giving you the time you need to settle in to your dream home and close the sale on your other house. You may also hear it referred to as a swing loan, gap financing, or interim financing.
Qualifying for a bridge loan can be competitive compared to other loan types. Lenders like Mid Penn Bank will look for things like:
- An excellent credit score
- Equity of 20% or more in your current home
- A low debt-to-income (DTI) ratio
- A good mortgage payment history
- Collateral options, such as your new home, other real estate, or even a business
The most common scenario in applying for bridge loans is to use the funds for the closing costs of a new purchase. Most lenders will loan you a maximum of 80% of your current home’s value and your dream home’s value combined, although the amount varies by term.
While these regulations are standard in most bridge loan applications, every situation is unique. Your real estate agent can give you a good idea of what to expect during the application process and whether you may be approved.
Can You Use a Bridge Loan for Building a House?
While it’s not the typical use for this type of loan, you can use a bridge loan for building a house. Using a bridge loan for this purpose allows you to break ground on new land while you still live in and are in the process of selling your existing property. Because construction takes more time and may require more costs than a bridge loan can offer, many people who use a bridge loan for construction ultimately refinance it with a more long-term loan.
If you want to build your dream home instead of searching for one that may not fit all your specific wants, consider exploring other loans suited to your plan, such as a construction loan or Home Equity Line of Credit. A quality lender like Mid Penn Bank will explain all of your options to help you make the best choice for your financial future.
Is a Bridge Loan More Expensive Than Other Loan Options?
Bridge loans are sometimes the only option you have for getting the home of your dreams, but they do tend to come at a higher cost. The main consideration of bridge loans that any party should take into account are the interest rates. Because bridge loans are short term, they have higher interest rates. This loan will help you consolidate funds and secure your new home, but you will end up paying more overall due to interest costs.
Something else to consider when exploring the additional expenses of a bridge loan are your mortgage payments. While the bridge loan will allow you to combine the costs of the two home mortgages and pay them simultaneously, once the loan closes, you will still be responsible for two mortgages — your new home’s payment and the loan repayment costs.
Get the Home You Want With Mid Penn Bank
Finding a home you love and learning that you can make it your own should be one of the most exciting times of your life, but it can also bring unexpected complexities. Mid Penn Bank knows how to navigate these, and our experienced lending team will do everything possible to assist you in making your dream home a reality.
If you or your real estate agent thinks a bridge loan will be suitable for buying or building your new house, learn more about it by contacting us today. Our competitive rates and fast approval times make us one of the most sought-after loan suppliers in Central Pennsylvania.
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