What Are Bridge Loans?
Bridge 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 home. The funds from the bridge loan are then used as a down payment on the move-up home.
How Do Bridge Loans Work?
Many lenders do not have set guidelines for FICO minimums nor debt to income ratios. Funding is guided by a more “make sense” underwriting approach. The piece of the puzzle that requires guidelines is the long-term financing obtained on the new home.
Some lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. This means the borrower is qualified to buy the move-up 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 first mortgage on a present home.
- The buyer will likely close the move-up home purchase before selling an existing residence.
- For a short-term period, the buyer will own two homes.
If the new home 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 home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50% debt-to-income ratio.
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