How a Bridge Loan Can Help You Buy a Home in New York
If there’s one thing that people tend to struggle with when they’re buying real estate in New York City, it’s the funding.
Getting approved for a home loan isn’t easy, which is why there are so many programs that are meant to help people get the money they need for an NYC home.
The two biggest issues people have when it comes to getting approval are income and the down payment.
While you can get a VA loan without a down payment, civilians don’t access to that type of loan within reach.
Saving up for a down payment isn’t always feasible, especially if you want to upgrade your home or buy a larger investment home in city limits.
Depending on your situation, getting a bridge loan might be a good move for you.
How a Bridge Loan Can Help You
- A bridge loan is a type of loan that helps "bridge" the gap between selling and buying. It's useful for sellers who want to purchase a new home right away but whose funds are tied up with their home sale, which may be on the market but not sold.
- This loan is a short-term loan, expected to be paid off with the sale of one's home.
- A bridge loan is a great way to put money down and cover closing costs, however, they can have high fees and interest rates associated with the loan.
- Some typical requirements in order to qualify for a bridge loan are having excellent credit and owning at least 20% equity in your home. Being in a hot real estate market is also a plus.
- If getting a bridge loan isn't possible for you, you can try getting a HELOC or taking a different type of loan.
What Is a Bridge Loan?
A bridge loan is a type of loan that acts as temporary funding for a purchase, while people secure longer-term funding.
In the real estate world, bridge loans are used to get a down payment ready on a new home while they wait for their own home to be sold.
Bridge loans are used to help get the funds necessary to buy a home, but they aren’t long-term loans.
Rather, they’re short-term loans that are expected to be paid off when your original home is sold off...or within a year of buying the new home.
Why Would Someone Use A Bridge Loan?
Bridge loans have multiple uses that make them attractive to certain buyers. These include:
- Giving you a way to get a down payment and cover closing costs. This is the big draw for many people, but it’s worth pointing out that there are other ways to make this happen.
- Getting approval is quick, which makes buying a home faster. Fast approvals make this a huge draw for people in hot markets. Speaking of which…
- Many sellers will take a buyer who has a bridge loan over a buyer who doesn’t. Since bridge loans basically guarantee that you have some kind of financing (or at least a way to make ends meet until you do), they will take this as a sign that you will be more capable of financing the home than someone who doesn’t.
What Are The Drawbacks Of Having A Bridge Loan?
The three biggest issues people have with bridge loans are the high-interest rates, the high fees, and the short lending terms.
Since there are so many fees associated with this loan type, it’s a notoriously expensive route to go.
When Does A Bridge Loan Make Sense?
Knowing both the perks and the pitfalls of using bridge loans paints an interesting picture when it comes to finances.
It becomes clear that using these loans tends to only make sense when you are looking to buy a home in a high-demand market, know your home is going to sell, and need to move ASAP.
Because they’re considered to be pricey and somewhat risky, many financial advisors would suggest avoiding them if at all possible.
However, when you need the real estate deal to get pushed through quickly, they can make a lot of sense.
How Common Are Bridge Loans?
Though the concept of a bridge loan could prove to be useful for many people, the truth is that it’s not exactly a normal thing to see in most housing markets.
New York City’s a different story, primarily because all the real estate in the area is in high demand.
How Do Bridge Loans Work?
In order to get a bridge loan, you will usually have to use your current home’s equity as leverage. Bridge loans are typically used in one of two ways:
- The bridge loan can be used to pay off your original home and give you extra cash for a down payment on a new home. This gets rid of the debt and also lets you access your home’s equity for a down payment that works with your budget. When the original house is sold, you pay off the remnants of the bridge loan.
- You can also use it to just create a down payment if you already paid off your home. People who already paid off their home can use a bridge loan to get the down payment they desire without having to save up for it. These loans are far lower in equity.
Find out about your other costs to close by reading How to Calculate Closing Costs in NYC: A Guide For Buyers.
What Happens If Your Home Sale Falls Through?
Let’s say you get a bridge loan and you just can’t find a buyer within the term limits.
This can happen to the best of homes.
Should this occur, some lenders may be open to extending the terms. However, this is rare.
The big risk of a bridge loan is that you might not find a person to buy your home.
When this happens, you’re responsible for both your mortgage and the bridge loan. This can lead to a default or other significant stress.
Can I Qualify For A Bridge Loan?
This is a tough question. Though all lenders will have their own requirements, there are some general guidelines that they tend to follow.
- You must own at least 20 percent equity in your home. The more equity you have, the more you can borrow through a bridge loan.
- You must have excellent credit. If you don’t have at least a 720 credit score, this is not a doable option in most cases.
- Your home must be in a hot market. Technically, this isn’t a requirement for lenders, but rather a requirement you should make for yourself.
If you aren’t confident your home will be sold, you shouldn’t try to get a bridge loan. It could easily backfire.
If you are having trouble qualifying because you need to improve your credit score, read How to Improve Your Credit Score to Get Approved.
What Alternatives Are There To Bridge Loans?
In many cases, people who need a “stop-gap” for funding can’t get bridge loans or just don’t want to deal with the high price tags.
If a bridge loan doesn’t quite make sense for your home buying plan, there are other options you can consider along the same lines.
Home Equity Lines of Credit are just what they sound like—credit lines that use your home equity as your funding source. You often get better rates, lower fees, and longer timeframes with this choice. If you don’t sell your house, a HELOC will still allow you to make home improvements. So, it’s more flexible too.
This involves taking out two mortgages to avoid the 20 percent minimum down payment requirement on a traditional loan. One mortgage is for 80 percent, the other is for 10 percent, and the rest of the down payment will only be 10 percent.
Trying A Different Loan Type
You might not be able to get a VA loan, but you still might be able to avoid paying 20 percent down on a home through other lending methods. FHA loans, for example, only require 3.5 percent down in many cases.
Asking For Help
There are several groups that help people get their home down payment despite not having the funding available. Checking the New York Housing Authority for assistance can help.