Stop me if you’ve heard this one before. You’re ready to buy a new home, but all your equity — including the down payment for the new place — is tied up in the house you currently own. What are your options? In most cases, it’ll come down to a bridge loan, but there are a few considerations.
The Ins and Outs of Bridge Loans
First, it’s important to understand that not every bank services this type of loan. So don’t panic if you call your bank and they tell you this isn’t an option. It is, you just need to find the right lender.
While a traditional bank assumes a home that hasn’t sold isn’t going to sell, a lender that offers bridge loans tends to look at the bigger picture. The bridge loan offers two benefits — first, it provides the down payment you’ll need for the new home, and second, it doesn’t penalize buyers because they haven’t yet sold the first home. Lenders who offer bridge loans typically provide clients with a home equity line of credit, which gives them the equity they need out of their current home to use as the down payment on the new home. There’s often an agreed-upon timeframe for selling the old home — typically within a year — as well as good-faith signs that the home really is for sale, like an agreement with a listing agent. In that way, these buyers are able to qualify for their maximum purchase price without any penalties for the as-yet unsold current home.
Different lenders will have their own policies and protocols, but the general rule of thumb is that the bridge loan can cover anywhere from 70 to 80% of the equity in the unsold home. They’ll also be particular about who qualifies for such a program. Typically, lenders will want buyers who have some level of liquidity, since they’ll be carrying both properties potentially up to a year. It’s a fine line, since buyers looking for bridge loans aren’t wildly liquid to begin with, or they wouldn’t need this type of loan.
If this is something you’re considering in Reno or San Francisco, I’m happy to talk through the specifics and put you in touch with a few of my favorite lenders.