At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
DISCLAIMER: As a friendly reminder, this post is intended for educational purposes, not financial advice. If you need assistance navigating the use of a bridge loan in Texas, HomeLight encourages you to reach out to your own advisor.
With low inventory and heavy competition in many parts of the state, if you find a house you want to buy in Texas, it might be a good idea to get it even if your house hasn’t sold yet. How? Explore a bridge loan and let your home’s equity help fund your next house in the short term.
A bridge loan can be a fitting solution when you’ve found your dream home and need to act quickly, or you need more time to prepare your old home to sell, allowing you to buy before you sell.
In this post, we’ll unpack this financing option and how you can put it to work for you.
What is a bridge loan, in simple words?
A bridge loan for a real estate transaction is a short-term loan that enables homeowners to purchase a new home before their current home sells. Also called a swing loan or bridging loan, it allows a homeowner to leverage the equity in the home they’re selling to provide the funds for a down payment and closing costs on their new house.
As Don Keeton, a top-performing real estate agent with 47 years of experience, says, with a bridge loan, “you can tap the equity of your current home before you’ve sold it.”
Although they are often more expensive than a traditional mortgage, a bridge loan can hasten the process with added convenience. According to the National Association of Realtors, 38% of home buyers have relied on a bridge loan to see them through to their next abode.
How does a bridge loan work in Texas?
If a Texas buyer has found “the” house before selling their current home, using the equity accrued in the existing home to cover the down payment and closing costs can be a good option to avoid letting that dream house slip away.
Bridge loans are short-term, emphasis on “short.” Also called interim loans or gap financing, most include terms from six months to one year, and are expected to be repaid as soon as you sell your current home. Think of them as bridging the gap between when you need the money to buy a new house and when you receive money from the sale of your current home.
Because they’re short-term and because of the risk factor involved in selling your current home, interest rates are generally higher with them than with a mortgage. But there are similarities. For example, you may have to pay an origination fee, and you might be able to use the same lender who is servicing your new mortgage, although not all traditional lenders offer bridge loans.
That lender may calculate your debt-to-income ratio (DTI) to qualify you for a bridge loan. This DTI could include your current mortgage payment, the mortgage payment on the new home if it’s not under contract with a buyer, and the interest-only payment on the bridge loan.
What are the benefits of a bridge loan in Texas?
A bridge loan may be an option that facilitates the purchase of a new home before selling your current home.
Depending on where you live in the state, median housing prices in Texas can range from $313,000 in cities like San Antonio to $450,000 in areas like Austin-Round Rock. Higher interest rates have made sales volume go down, but prices have gone up over the last year. This is partly due to the fact that inventory is not keeping up with demand.
All these factors point to trying to lock in the purchase of the house you want, no matter where you are in the sales process of your current home. Despite its higher cost, a bridge loan may offer some benefits. Let’s review the upsides.
You can make a non-contingent offer on your new home
When an offer is contingent upon the buyer selling their current home, it’s not as competitive as a non-contingent offer. A contingency is a term or condition that must be met before the sale can be completed. Many buyers with a home to sell include a sales contingency on their offers. In a competitive seller’s market, the seller may prefer a “clean” offer, free of contingencies, to hasten the sale.
About half of all buyers already own a home, so contingencies are common. While only around 5% of contracts are terminated due to contingency issues, many sellers still prefer to accept offers without contingencies.
Heidi Daunt, branch manager and owner of Treehouse Mortgage Group, says, “If you have an approved bridge loan, you can write a non-contingent offer, so it gives you better negotiating power on your new purchase.”
According to Keeton, “If you go to a seller and say, ‘Would you wait until I sell my house?’ in today’s market, they’ll probably say ‘No.’ A bridge loan is a way for you to take control of that house so you don’t lose it to another buyer.”
You only have to move once
If the homeowner has sold their home before being able to purchase a new one, they may be forced to move into a short-term rental. In addition to the added inconvenience of moving twice, there may be extra costs. According to Move.org, the average cost for a move is $9,060. Multiply that by two if you have to find a temporary home because you don’t have a bridge loan to move directly into your new house.
“Sometimes what you have to do is sell your house, move to an apartment, buy another house, and then move again. A bridge loan helps avoid that,” Keeton says, who works with over 75% more single-family homes than the average agent in his market.
You can prepare your old home for sale after moving out
If the seller uses a bridge loan to move into their new home, it can give them a clean slate to get their old home ready to list, with less pressure and less in the way.
Some lenders don’t require payments during the loan period
If you get a lender who allows a grace period to defer payments, or who charges interest-only on a bridge loan, it can ease the financial pain and make a bridge loan even more convenient.
You can get funding for materials and equipment for construction.
If the new house you’re moving to is new construction or a renovation, a bridge loan can provide funding to purchase materials and equipment to do the work.
What are the risks of a bridge loan?
It’s important to weigh the pros and cons of any financial venture. A bridge loan may be a great option to help you through a difficult real estate transaction, but it’s not right for everyone in every circumstance. Some things to consider include:
Additional loan costs
Bridge loans are typically pricey, with higher interest rates than standard home loans. Rates vary, but expect them to be at least 2%-3% higher, with additional fees tacked on.
You have two payments
A bridge loan will significantly increase your debt. Even if the lender grants abatement on payments until your old house sells, you’ll incur some hefty fees.
It can be difficult to qualify for them
Because you’ll be paying on two loans, lenders will carefully vet you to determine if your income can manage that. They’ll also examine the amount of equity you have in your home; if you owe more than 80% of the home’s value, you may not qualify.
Is it worth getting a bridge loan in Texas?
Despite the extra cost, a bridge loan may be the right solution in some circumstances, such as:
- You don’t have money for the down payment on your new home until you sell your current one.
- You want to move only once.
- You found a new home and don’t want to risk losing it to another buyer, so you need to act quickly.
- You aren’t able to close the sale of your existing home before closing on your new place.
- You made an offer, but the seller won’t accept a contingency.
- You can’t get your home ready to sell while living in it, or you need to make major renovations before listing it for sale.
What’s required to get a bridge loan in Texas?
To qualify for a bridge loan in Texas, you typically need:
- Qualifying income: Your lender will evaluate your income to determine if you can afford to make the payments on your current mortgage, your new mortgage, and a bridge loan (which may be interest-only).
- Sufficient existing equity: You should have at least 20% equity in your current house. Some lenders require up to 50% equity, so be sure to check.
- Good credit history: Depending on the lender or bridge loan program, you need a favorable credit score – typically above 650. Your score can impact the interest rate and other qualifications, such as loan-to-value ratio.
- Your current home to be listed for sale: Some lenders require proof that your current home is on the market to ensure it’s sold by the end of the bridge loan term.
How much does a bridge loan cost in Texas?
While your creditworthiness and the size of the loan influence the rate you qualify for, the interest rate on a bridge loan can range from the prime rate to between 9.5% and 10.5%.
It’s not unusual to see a 2% premium for this kind of financing, but it varies depending on the lender. If your bridge loan is with the same lender as your new mortgage, you may not need to pay for extra underwriting or other mortgage fees; the bridge loan and new mortgage can be underwritten and approved at the same time. Keep in mind that you will also have to pay closing costs as well as legal and administrative fees.
Closing costs and fees usually run from 1.5% to 3% of the loan amount, and may include:
- Appraisal fee
- Administration fee
- Escrow fee
- Title policy costs
- Notary fee
- Loan origination fee
Who provides bridge loans in Texas?
Daunt believes that a lot of people don’t even know that there are bridge loans available … or that they don’t understand them and can’t find a professional who offers them.
If you’re looking for a bridge loan in Texas, here are some places to start your search:
- Local banks
- Credit unions
- Hard-money lenders (private lenders)
- Non-qualified mortgage (non-QM) lenders
There are also modern real estate companies that can seamlessly handle finding you a bridge loan to help you fill the gap between buying and selling a home. We’ll share how this works later in this post.
Are there alternatives to bridge loans in Texas?
If a bridge loan isn’t right for you, there are some alternatives to consider:
Home equity loan: A home equity loan allows the borrower to use the existing equity in their current home as collateral. This type of loan creates a lien against the property and reduces the equity the homeowner has in the house. Interest rates may be higher than the rate on the first mortgage. An advantage, however, is that instead of opting for a cash-out refinance on, for example, a $300,000 mortgage with an interest rate of 3% of $400,000 at 5% to pay off the first mortgage and borrow $100,000 cash, you can simply borrow $100,000 at 6%, leaving the first mortgage in place at its lower rate.
“Let’s say you see the deal of the century. If you have a home equity loan with $100,000 available and don’t have any funds drawn, you could write a check right then,” Keeton notes.
Home equity line of credit (HELOC): Like a home equity loan, a HELOC leverages the equity in your home, but instead of receiving a lump sum payment, you’ll gain a line of credit against which you can borrow as needed. Generally, the interest rate is lower than a home equity loan’s rate.
Cash-out refinance: A cash-out refi allows the borrower to pull out some cash when they refinance. Interest rates can be higher than a regular refi due to the added amount of money on the loan, but are typically lower than a bridge loan rate. A limiting factor comes from the fact that you cannot have two owner-occupied loans within one year of one another, Daunt confirms.
80-10-10 (piggyback loan): Simultaneously taking out both a first and second mortgage to fund a new house is known as piggybacking. It results in needing only 10% for a down payment, which helps buyers who can’t make a large down payment until they sell their home. However, paying three mortgages until the first home is sold can be a challenge.
401(k) loan: You can borrow against your 401(k) or other retirement funds to purchase a new home, through a 401(k) loan or a withdrawal. This type of loan comes with some drawbacks. If you withdraw funds from a 401(k) or IRA before you’re 59-1/2 years old, there’s a significant fee. The IRS charges a 10% penalty and requires you to pay income taxes on the money withdrawn – unless you qualify for an exception for individual retirement accounts (IRA) by being a “first-time homeowner,” meaning you haven’t owned a property in the past two years. If you qualify, you can withdraw up to $10,000 without penalty. If you choose a 401(k) loan, borrowing from your own retirement account, there is no penalty fee or tax payment. However, you have to pay back the money with interest within a certain amount of time (typically five years).
Are there modern ways to buy a house before I sell?
With today’s technology, there are real estate solution companies like HomeLight that incorporate bridge loans into convenient programs that streamline the process of buying and selling a house at the same time in Texas. These “Buy Before You Sell” programs can provide a more complete “bridge” to help you successfully complete your move to a new home, thereby reducing stress and worry.
Together with your agent, HomeLight can help you move into your new home with speed and certainty, while helping you get the strongest possible offer for your old home.
Examples of other “Buy Before You Sell,” or home trade-in service companies include Knock, Orchard, Flyhomes, and Homeward.
How does HomeLight Buy Before You Sell work?
If you’re looking for a low-risk way to buy a home while selling your current one, there are a number of programs available that enable homeowners to buy a new home before selling their old one without the usual uncertainties and hassles. If you’re in the states of California, Florida, Texas, Colorado, or Arizona, consider exploring HomeLight’s Buy Before You Sell program.
Here is how HomeLight’s Buy Before You Sell program works for home sellers in Texas:
- Apply in minutes with no commitment: Find out if your property is a good fit for the program and get your equity unlock amount approved in 24 hours or less. No commitment is required.
- Buy your dream home with confidence: Once you’re approved, you’ll have access to a portion of your equity in your current home. You’ll be able to submit a competitive offer with no home sale contingency at any time — regardless of how long it takes to find your dream home. Our near-instant Equity Unlock Calculator lets you estimate how much equity we can unlock from your current home.
- Sell your current home with peace of mind: After you move into your new home, we will list your unoccupied home on the market to attract the strongest offer possible. You’ll receive the remainder of your equity after the home sells.
*Check with your agent about availability and pricing in your market.
Benefits of HomeLight's Buy Before You Sell program
- Flexibility in timelines: No need to sync up sale and purchase dates perfectly. This program gives you breathing space to plan your move without feeling hurried.
- Financial peace of mind: Say goodbye to the stress of potential double mortgages or dipping into savings to bridge the gap between homes.
- Enhanced buying power: In a seller’s market, a non-contingent offer can stand out, increasing your chances of landing your dream home.
- Sell for up to 10% more: After you move, you can list your old home unoccupied and potentially staged, which can lead to a higher selling price, according to HomeLight transaction data.
For homeowners caught in the buy-sell conundrum, HomeLight’s Buy Before You Sell program offers a convenient and stress-reducing solution. See more program details at this link.
HomeLight also offers other services for homebuyers and sellers in Texas, such as Agent Match to find the top-performing real estate agents in your market, and Simple Sale, a convenient way to receive a no-obligation, all-cash offer to sell your home in as little as 10 days.
A creative financing solution for Texas homeowners
As Texas homebuyers navigate a challenging market with limited inventory, some are turning to bridge loans to simplify the process of buying a new home and selling their old one. Bridge loans let homeowners borrow against the equity they have built in their previous home to put toward their new purchase, giving them more time to sell and taking away much of the hassle of getting the timing just right.
Consider HomeLight’s Buy Before You Sell program to take the uncertainty out of your next home purchase.
Writer Madeline Sheen contributed to this story.
Source: (SergPoznanskiy / Deposit Photos)
HomeLight Home Loans NMLS #1529229 | Equal Housing Lender | NMLSconsumeraccess.org | homelighthomeloans.com/licenses-and-disclosures | 1375 N. Scottsdale Rd., #110, Scottsdale, AZ 85257 Telephone 844-882-3283