Orange County Real Estate Success

Imagine finding your dream home, but you haven’t sold your current one. A bridge loan for real estate can provide the funds to buy that new property without jeopardizing your offer due to selling contingencies. Keep reading to learn the essentials and explore real-world scenarios.

Understanding Bridge Loans for Real Estate

A bridge loan is a short-term solution. It bridges the gap between buying a new home and selling your existing one. This loan type lets you make a non-contingent offer, strengthening your position in competitive real estate markets.

Why Consider a Bridge Loan for Real Estate?

Sometimes, the perfect property appears at the wrong time. Bridge loans turn you into a stronger buyer, removing the contingency of selling your current house. This helps in a few key situations.

Winning in Competitive Markets

Sellers and real estate agents prefer non-contingent offers. A competitive offer with a quick closing is more appealing than one tied to a home sale.

Bridge loans create a cash-like advantage. They streamline the closing process and alleviate financing concerns. This quick close and certainty make your offer much more attractive.

From a seller’s perspective, this reduces the escrow timeline and potential uncertainty of getting your existing home under contract. It also simplifies the transaction, reducing potential complications.

Flexibility and Peace of Mind

Bridge loans provide breathing room. They give you time to sell your current house without rushing. Yes, you may be paying two mortgages simultaneously for a period, until your first home sells; but your bridge loan lender will work with you to ensure you have the proper amount of reserves to hold both properties for a time. The bridge lets you control your moving timeline and maximize the profit from your sale.

Navigating the Bridge Loan Process

Bridge loans operate similarly to traditional mortgages but with added steps. They utilize your current home’s equity to cover the down payment and other costs. This impacts the qualification process.

Qualification and Underwriting

Lenders review your debt-to-income ratio, credit score, and home equity. They often prefer a loan-to-value ratio under 70%. You will need substantial home equity to qualify. Lenders might want to check your personal loans or other credit cards, so be sure to disclose your full financial situation when securing the loan. Also keep in mind and ask upfront about prepayment penalties as part of loan agreements.

Interest Rates and Costs

Bridge loan rates are typically higher than those for regular mortgages. Rates can range from 6% to 16% in 2024, according to various sources. However, keep an eye on how these compare to money market accounts or CD rates, as these offer potential returns while maintaining easier access to cash, if necessary.

Home equity loans can potentially offer a lower-cost alternative, if you already have a line open when you find the property you love. HELOCs may provide a 2% lower interest rate on average compared to other loans. These loans leverage your home’s equity for funding but often require strong credit to qualify, and a 20-30 day turnaround. For some buyers, the wait is too long to obtain the property they want.

It’s also helpful to compare with the prime interest rates and current mortgage rates. Knowing where prime rates sit will give an idea about interest rate trends.

Repayment

Most bridge loans last around one year or less. The typical plan is to repay the balance with proceeds from the sale of your old home. Most bridge loans have a firm due date. Talk with a Certified Mortgage Planner or experienced lender about repayment terms to make sure everything is clear and aligns with your other savings accounts. This also includes how your bridge loan will impact your business credit, if applicable.

Bridge Loan for Real Estate: Pros & Cons

Bridge loans present opportunities and challenges. So, you want to save for your loan? First, get familiar with how these factors are changing the game for you – it’s the smart way to start. Discuss it with a loan officer or mortgage lender to see how a bridge loan might impact your other mortgage products or financial plans.

Pros

• Competitive Edge: Make non-contingent offers, strengthening your purchase power.
• Buy Before You Sell: Secure your new home before selling your current property. Take your time prepping and selling to maximize profit without worrying about housing deadlines or mortgage payments for your new purchase until your current house closes.
• Quick Closing: Funding secured upfront enables a swift and more competitive close, outpacing offers subject to financing or other sale contingencies, allowing a faster approval process and expediting when you start paying down the new mortgage.

Cons

• Higher Interest Rates: Expect higher rates, around 2% above standard mortgages. If using the bridge loan to pay down debt, compare how it differs compared to debt management plans through things like a balance transfer to potentially lower interest and how this interacts with current refinance rates.
• Double Payments: You may have to make payments on both loans briefly. Account for this to avoid financial strain and know how your cash flow will be affected, especially for first-time homebuyers unfamiliar with juggling two sets of mortgage lenders at once or understanding the loan approval process. If necessary, speak to someone who knows your finances to create a savings calculator to account for both and discuss if it makes sense for your current financial situation.
• Complex Underwriting: The approval process can be stringent. Meeting lenders’ loan-to-value (LTV) requirements becomes crucial due to the increased risk associated with using home equity as collateral. They will be taking into account how much you’ve saved, how often you contribute to savings accounts and other details to help ensure it’s the right move given the complexities involved. There’s less paperwork if exploring other mortgage options like cash-out refinance, so you might want to keep your other savings cds as options rather than using up available funds in a short time period, especially if concerned about approval process timelines. Also take a look at prepayment penalty information in those financial accounts before borrowing from them as well to make sure it is worth using that to fund your home loan rather than taking on more debt if concerned.

Alternatives to Bridge Loans for Buying Real Estate

Before deciding, review alternatives and get your financial team’s input.

Home Equity Loans

A home equity loan leverages your current house’s value for the needed funds. You retain your first mortgage but make an additional monthly payment on the new loan.

HELOC (Home Equity Line of Credit)

A HELOC functions similarly to a credit card, but it’s secured by your home equity. The existing mortgage remains, potentially affecting your chances for other financial agreements.

Let’s Chat – Should you cross the bridge?!

A bridge loan can help you quickly purchase real estate in dynamic markets. Be aware of the expenses and higher rates, ensuring your financing plan accounts for these before starting a new mortgage to stay compliant. Understand the complexities, as this may not be the ideal option for all buyers. Though suitable for those with ample resources, thorough planning with checking accounts, exploring refinance lenders or refinancing through a mortgage refinance could help ensure the move goes as smoothly as possible, including any interactions between refinance rates with mortgage payments for either loan. Ensure due diligence with any mortgage rates to determine how it will interact with the balance on any credit cards as well to keep track of overall balances for long-term financial plans, especially if you own a small business. A bridge loan is a complex product and requires planning. Speak with a trusted advisor before using a bridge loan to make sure it aligns with your existing personal loans, student loans and financial goals, both short term and long term. 

AskAngie team has a list of Orange County and Southern California Bridge Loan lenders if you would like a personal referral. With 20+ years selling real estate, we don’t shy away from complicated deals, and we can help you coordinate all the many aspects of buying a new home before selling your first property. Fill out the form below or text Angie at 949-338-7408 to get started!