A "bridge loan" is a short-term loan allowing you to dip into the equity in the property you already own to help bridge the purchase of one you want to buy. They are useful because in New York City, it’s rare for a seller to accept an offer from someone where the purchase depends on the sale of another unit.
“It’s not unheard of,” says Mark Maimon, vice president at Freedom Mortgage, “but in a market that’s even remotely competitive, the one without the offer being contingent on another property sale is going to have the edge. The bridge loan allows someone to access the cash that they would have had if they had sold their unit first.”
Qualifications for a bridge loan are tougher than a regular loan and there are risks, mainly the financial one of carrying two mortgages. Bridge loans also won’t work for everyone—if you own in a co-op, boards generally don’t agree to this type of financing, but in a sluggish market, you may well find brokers recommending bridge loans as they try to encourage buyers to get off the fence. If that’s the case for you, here’s what you should know:
Bridge loans can be higher-rate loans
Bridge loans are time-specific and because they are generally short term, they are often at a higher rate than normal loans. It’s the way banks balance out the risk of offering the loan.
“It can be a higher rate and depending on the time, it can include points and higher closing costs,” says Maimon. It’s up to the buyer to work out if the temporary financing is still cost effective when you consider organizing storage, setting up a short term rental for your family and some of the other costs associated with selling your apartment before buying a new one.
Other risks include the double mortgage and the pressure to sell
One of the obvious risks is that you may be carrying two mortgages for a period of time. Another is not being able to sell. Maimon says, “The qualifications take this into account and we recommend that someone has a larger cushion of cash on hand to make duplicate payments.”
Maimon says the loan can be structured in ways that mitigate risks. In some cases, the lender can make the loan payments out of an account set up for the purpose, which helps avoid defaulting.
If you own a co-op it’s hard to get a bridge loan
It’s hard to persuade co-op boards to approve this kind of financing. Julie Friedman, founder of the Friedman Team at Compass, says, “Bridge loans may be a highly effective tool to cover a buyer between two condo purchases, but it won't fly with most co-ops.”
Friedman says co-op boards view bridge loans as another liability and interpret it as added debt.
Maimon recommends a first step of asking if the board is open to it. “It’s the same process as if you were refinancing. You’d need to submit a board package and get their pre-approval,” he says.
Bridge loans allow you to avoid temporary housing
On the plus side, a bridge loan helps avoid some of the uncertainties of the market. Maimon says the rationale of using a bridge loan is the same in a competitive or a sluggish market.
“We see bridge loans a lot with families with young kids and also older buyers who don’t want the emotional trauma of temporary housing and putting things in storage. It’s also helpful for people who need to renovate and it might be a year before they can move in,” he says.
Not all banks offer bridge loans
Some banks won’t offer bridge loans, a type of financing, sometimes called a hard money loan. Friedman says, “Conceptually, bridge loans make total sense, freeing the buyers to use the loan to cover the new purchase rather than sell parts of their investment portfolio,” but these kinds of transactions have traditionally been more common for commercial real estate transactions.
Alexander Bogod is an associate broker with Broadway Realty and says as the market shifts that could change. “The market continues to be soft and sellers are more willing to accept offers with more risk of the buyer not going to close. I think we will see more deals happening with loan contingencies,” he says.
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