Bridging the Gap

Here are some financing arrangements that could help you cover your down payment and closing costs if you buy a new home before you sell your old one.

BRIDGE LOAN

Short-term financing intended to fund your down payment and closing costs while waiting to sell your house. The loans are usually short-term and carry high interest rates.

Pros: Provides flexibility by allowing a home buyer to proceed with closing a deal to buy a new house before selling his or her current home.

Cons: If potential buyers become aware that the homeowner has secured a bridge loan, it can serve as a red flag that the homeowner is under pressure to sell, which could elicit lower offers.

BRIDGE LOAN WITH DEFERRED INTEREST PAYMENTS

The bank provides a loan that pays off the current mortgage and allows the seller to use remaining funds to finance the down payment and closing costs on a new home purchase. The payment on the bridge loan is deferred for a set amount of time, usually six to nine months, while the homeowner tries to sell the existing home. When the borrower sells the home, he repays the bridge loan plus the interest.

Pros: The home buyer eliminates mortgage payments on the old house and the bridge loan payment is deferred. The upside for the seller is he seals the deal to sell his house without having to agree to a contingency on the sale, such as waiting until the home buyer sells his existing house before closing.

Cons: If a person is unable to sell his home before the term of the bridge loan expires, he will owe the interest that has accrued in one lump-sum payment. The bank may offer to extend the loan until a sale goes through but the borrower will still be liable for the interest that accrued during the first term on the loan.

100% FINANCING ON THE NEW MORTGAGE

The home buyer obtains 100% financing on the new mortgage and needs no down payment for the home, allowing him to buy even if he hasn't yet sold his current house, providing the buyer can get approved to hold two mortgages.

Pros: Allows the buyer to proceed with purchase without getting a bridge loan.

Cons: Mortgages with 100% financing are considered high-risk mortgages, primarily because they have allowed many people to purchase homes they can't really afford.