Nobody wants to carry two mortgages on two homes at the same time. Sometimes, however, an overlap occurs between buying a new home and selling the old one. Here’s where a bridge (or "gap," or "swing") loan can take the pressure off the monthly budget and provide down payment money.
- Take a short-term loan. A bridge loan is a short-term loan for which the equity in your old home (and sometimes in your new one) serves as collateral. Various lenders charge different interest rates – often 1 or 2 percentage points above the current prime rate, or a bit higher than the current regular mortgage rate. Depending on the lenders’ requirements (appraisal, title search, etc.), closing costs can be anywhere from 0.5% to 1.5% of the loan amount.
- Pay off as you choose. You may pay the loan off when you sell your home, or in monthly or quarterly installments. If your home does not sell within the specified term (often 6 months or a year), the loan is usually renewable.
MORTGAGE PRE-QUALIFICATION VS. PRE-APPROVAL
The First Step To Buying A Home Is Borrowing
Shopping for a home before you've been pre-qualified for a mortgage is like putting the cart before the horse. The same can be said about writing a contract to buy a home if you aren't pre-approved for a loan.
First, understand that any lender will want to know where you stand financially, so you should figure this out before you do anything else. You need to determine how much money comes into your household each month-and how much goes out.
Where You Stand
Start by calculating your total monthly gross income, including your regular pay and other sources of "hidden" income: a raise that's due before your first mortgage payment; a history of bonus or overtime income; income from investments and rental property; child support and alimony.
Now calculate your monthly debts: credit cards, student loans, car payments, etc. Do not include monthly household expenses such as utilities, groceries or utility bills.
Next, add up any assets you could use for a down payment: savings, gifts from a relative or friend, stocks and other investments. If you have good credit, some programs allow you to buy a home with no down payment at all. Still, most borrowers make down payments of 5% to 20%.
After compiling all of these numbers, you should have a picture of where you stand financially. The next phase deals with pre-qualification and pre-approval.
Pre-qualification is simply a verbal exchange in which the lender looks at your statement of income and debt, and estimates how much you can afford to borrow, assuming no extenuating circumstances. It's a guideline-not a commitment. With a rough idea of how much you can afford, it's much easier to go home shopping.
When it comes time to actually purchase a home, however, the lender starts verifying all the information on your application and may find some inaccuracies or problems in your credit file, which could delay, even cancel, settlement. Being pre-approved before writing a contract can prevent such headaches.
Loan pre-approval is a commitment from a lender to provide you with a loan for a specified amount. This means the lender has already verified everything on your loan application.
Lenders determine how much you can afford to spend on housing by calculating your debt-to-income ratio. With many loan programs, your monthly mortgage payment, including principal, interest, taxes and insurance (if applicable) cannot exceed 28% of your gross monthly income. That amount combined with the rest of your monthly debts cannot exceed 36%.
If you're in a seller's market, it's important to go the extra step for pre-approval-removing a seller's fears that something may ruin the deal at the last minute. Pre-approval also gives buyers a better negotiating position in a multiple-offer situation. Sellers are more likely to choose pre-approved buyers over buyers who haven't proven they can get a loan.
Give us a call to find out more about your buying power and to get started on the road to homeownership today.
As real estate professionals, we have experience in all aspects of home purchasing. E-mail us to take advantage of our knowledge of the kinds of financial assistance that are available or visit our Real Estate Encyclopedia for answers.