Updated on October 27, 2017
A bridge loan is a loan of money to cover a gap in time and money between two transactions, typically the gap is the buying of one house and the selling of another. There are pros and cons to using a bridge loan, which we explain below.
In a highly competitive seller’s market, a savvy seller may not be willing to wait on the buyer’s sale of their home, so an eager buyer would then make a non-contingent offer to buy the new home. The problem is that often times the buyer will need the down payment from the sale of their prior home to use for the purchase of the new home. The big benefit of a bridge loan is that it allows the buyer to be competitive in their offer to buy even though their down payment is tied up in another property.
Finally, the biggest con is there is a potential where the borrower on the bridge loan buys a new property using the bridge money loan but then fails to sell the home they are seeking to sell. As a result, the buyer would now have 3 loans instead of 1. Remember the buyer’s goal is to sell the first house and use that money to buy a new house – to extinguish their old home loan so that they can get a new home loan on their new purchase. Thus the goal is to go from one loan to another. But, with a bridge loan there is a potential where the buyer could have 3 loans if their house does not sell – the original loan, the bridge loan and the new loan. This could place severe and dire financial constraints on the buyer and could even lead to a default. This risk, however, is lessened by the fact that most lenders will not lend on a bridge loan without an analysis of risk based on the possibility that the first house may not sell.
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