While it is always better to sell your home before buying a new home, at Summit Funding, we understand that things do not always work out like you want them to. Some homeowners find their new home and are ready to buy it before their house sells. A special type of loan called a bridge loan is designed for these situations.
Also known as gap financing or a swing loan, bridge loans are really just a short-term loan to help you buy a second home until you get long-term financing in place. A swing loan allows you to buy your new property and then repay it within six months or so from the proceeds of the sale of your first house.
Swing loans are not the only option when you are buying a new home and need temporary financing. You may also consider a home equity loan. Equity loans are typically more affordable than bridge loans, but most lenders will not allow an equity loan if the home is placed on the market.
If you are considering a bridge loan to purchase a new home, it is important to review all of your options and make sure you understand the benefits and drawbacks of swing financing. There are several unique benefits to a gap loan:
There are a few drawbacks to this type of loan, however. Gap financing tends to be a more expensive option than other loans, and you must get qualified to own both properties. This means you must show you have enough income to pay both loans because this is what you will need to do in a worst-case scenario.
Gap loans usually do not have specific underwriting requirements in terms of a credit score or a debt-to-income ratio. This type of loan is approached with common sense to make sure you can afford to pay your loan and that you will have enough from the sale of your home to pay off the balance.
Gap loans are usually excluded when a mortgage is made in terms of qualification, which means you can qualify for the purchase of your second home by adding the loan payment on your first mortgage onto the new mortgage. You will usually be required to qualify for both mortgage payments because you will legally own both homes for at least a couple of months.
Most gap loans have a due and payable date within six months at which point the loan is due in full. If your first home has not sold by this point, it is usually possible to obtain an extension on the loan. You will also be required to pay off the loan when your home sells.