Bridge Financing: What Is It?
When it comes time to finance your new home and you still have a loan on another home you own but plan to sell, you are likely to run into the term bridge financing. This is a special type of financing that can help solve the cash flow problems created by the need to complete the purchase of one home before you complete the sale of the other.
Filling In The Gap
It can be difficult to get the sale of your current home to coincide perfectly with the purchase of the new one in order to avoid a problem with cash flow. If you have a sale closing in 90 days on the old home, but find that you need a short escrow to close the deal on the new home, this can create a gap in cash flow.
Bridge financing allows you to close that gap and provides for the time period between the new purchase and the sale that will eventually provide the needed cash for that purchase.
Down Payments And More
Most people don't have enough cash on hand to pay the down payment on a new home prior to closing on the sale of the previous home. This can make it difficult to buy the home you want when you haven't yet sold your current home or are still in escrow.
Bridge financing allows you to make the purchase by covering down payments or other costs involved as part of the loan process. It will cover the difference on the expectation of payment in the near future.
Qualifying For Bridge Financing
Not every purchase transaction will qualify for bridge financing. In addition to credit requirements, you will need to have a strong expectation of the cash coming in to fund the new loan. Bridge financing doesn't guarantee that either loan will go through, and a problem with one loan can usually mean a problem with both. It is rare to obtain open bridge financing where there is no certain date for the assets to become liquid, since this comes at a high risk
In most cases bridge financing is only used for a very short period of time. Your mortgage expert can explain the details to you and let you know if bridge financing is an option for your situation.
For many people, this type of financing can make all the difference in the ability to purchase the home they really want while still waiting on the sale of a previous home.