A bridge loan is a short-term loan used to bridge the gap between the purchase price of a new home and the buyer’s new mortgage if the home has not yet been sold. The existing home will be used as collateral for the bridge loan. The bridge loan funds are then used to make a down payment on a new home.
How do Bridge Loans Work?
Many lenders do not have set minimum credit score or debt-to-income ratio guidelines. A “what makes sense” underwriting approach guides the funding process. The long-term financing for the new home will be the puzzle piece that will necessitate strict underwriting guidelines.
Some conforming loan lenders exclude the bridge loan payment from qualification. This means that the borrower is qualified to buy the new home by combining the existing loan payment on the buyer’s existing home, if any, with the new mortgage payment on the move-up home. Many lenders qualify the buyer for two payments for the following reasons:
By running the mortgage loan through an automated underwriting program, lenders will be able to accept a higher debt-to-income ratio if the new home mortgage is a conforming loan. If the new home mortgage is a jumbo loan, most lenders will limit the home buyer to a debt-to-income ratio of 50%.
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