The biggest challenge in the industry is a lack of knowledge. That’s why we are writing these articles; to provide bite-sized, digestible nuggets of information.
Bridge loans primarily come in two forms: down payment and purchase money. Down-payment bridge loans are very straightforward: a client cashes out equity from a property they own so they can use it toward a down payment on a new home. This may be a first, second, or even third lien on a property. For this type of loan, a traditional lender will handle the loan for the purchase. For buyers who have low or no down payments, bridge loans are widely used due to the speed of being able to obtain the funds.
Purchase money bridge loans are where it gets more complicated (and creative). These loans come in two different forms. A purchase bridge loan typically covers up to 75% or less of the purchase price of the new home. In this case, the client comes in with the down payment already in hand. This loan is often used for self-employed borrowers and business owners because the loans are not income-driven, which can many times deflate a self-employed borrower with increased income before completing the current year’s tax returns. But these bridge loans are also popular for people who are in a bidding war because a client can write an offer with no contingencies and close escrow quickly. Purchase loans are also pretty simple and we will not spend much time on them.
Cross-collateralized bridge loans are where the heart of consumer bridge loans lives, and where our focus will be. A cross-collateralized bridge loan is a loan of up to 100% (or more) of the price of the new home, where the loan is secured by both the existing home and the new home. Hence the term cross-collateralization. This makes it possible for clients to locate, purchase, and move right into the new home without having to sell their existing home first. Then, with their prior home now vacant, you’re free to freshen up and stage the old home and sell it for a better price. To further demonstrate the flexibility of a bridge loan, the “existing home”, can be the buyer’s primary residence, second home, investment property, parent’s home, or a residential property from anyone willing to lend equity!