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What are Bridge Loans?
A bridge loan is a temporary loan that bridges the gap between the sales price of a new home and the buyer’s new mortgage if the home has not yet sold. The bridge loan will be secured to the existing home. The funds from the bridge loan are then used as a down payment for the new home.
How do Bridge Loans Work?
Many lenders do not have set guidelines for minimum credit score or debt-to-income ratio. The funding process is guided by a “what makes sense” underwriting approach. The long-term financing for the new home will be the piece of the puzzle that requires strict underwriting guidelines.
Some lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. This means the borrower is qualified to buy the new home by adding together the existing loan payment, if any, on the buyer’s existing home 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 mortgage on the current residence.
- The buyer will likely close on the new home purchase before selling the current residence.
- The buyer will own 2 homes for a short period of time.
If the new home mortgage is a conforming loan, lenders will be able to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50% debt-to-income ratio.
If you have any other questions about how bridge loans work please don’t hesitate to contact one of our friendly and knowledgeable funding specialists.