Bridge Loans in Houston: How to Unlock Home Equity to Buy Before You Sell
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Joseph Gordon Associate EditorJoseph Gordon is an Associate Editor with HomeLight. He has seven years of experience reporting on the commercial real estate and insurance industries. He holds an MFA in Creative Writing from the University of San Francisco.
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.
Stepping into the real estate market in Houston can feel like a high-wire act, especially when trying to balance selling your current home with purchasing a new one. This balance of timing and funds becomes even more challenging in a market where inventory is scarce, and prices are sky-high. For many Houston homeowners, the dilemma often seems to boil down to selling first and then facing the inconvenience of moving twice – first to a temporary location and then to your new home.
But what if there was a smoother way to transition? Enter the bridge loan, a financial tool that could be the solution you’re searching for. Designed as a short-term financing option, bridge loans empower you to secure your next home in Houston before you’ve sold your existing one, simplifying the buy-sell process significantly.
Yes, You Can Buy Before You Sell. Why Move Twice?
Through our Buy Before You Sell program, HomeLight can help you unlock a portion of your equity upfront to put toward your next home. You can then make a strong offer on your next home with no home sale contingency.
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 Houston, HomeLight encourages you to reach out to your own advisor.
What is a bridge loan, in simple words?
A bridge loan, sometimes called a swing loan, bridging loan, interim financing, or gap financing, is a financial stepping stone. It’s designed to assist you, the homeowner, during the overlap period of selling your home and buying a new one in Houston. Here’s how it works: This type of loan leverages the equity in your existing home, providing you with the necessary funds to make a down payment and cover closing costs for your next home.
While bridge loans are typically pricier than conventional mortgages, they offer a significant advantage – speed. They enable you to quickly secure your new home in Houston without the wait that usually comes with needing to sell your old one first. This makes bridge loans a practical, albeit temporary, solution for those critical transition moments in your real estate journey.
How does a bridge loan work in Houston?
Imagine you’re in Houston, ready to move into your dream home, but your current house hasn’t sold yet. This is where a bridge loan comes into play, bridging the gap between selling your old home and purchasing your new one. It’s a common scenario for many Houstonians: you find the perfect new property but need to act quickly to secure it, even though your existing home is still on the market.
The lender financing your new home often offers you a bridge loan. They’ll require that your current home is listed for sale and typically provide the bridge loan for a period ranging from six months to a year.
A critical aspect your lender will consider is your debt-to-income ratio (DTI). This calculation includes the mortgage on your current Houston home, the mortgage for the new property, and any interest-only payments on the bridge loan. This assessment ensures you can comfortably handle payments on both homes, at least temporarily.
In some cases, if your current home is already under contract and the buyer has secured their loan, the lender might only consider the mortgage payment for your new Houston home in the DTI calculation. This flexibility can be crucial in managing your finances during the transition period. Ultimately, lenders are focused on ensuring you have the means to manage both properties, especially if your current home doesn’t sell as quickly as anticipated.
What are the benefits of a bridge loan in Houston?
Bridge loans offer several advantages that can make your home-buying journey in Houston smoother and more flexible:
- Flexibility in making offers: You can make a non-contingent offer on your new Houston home.
- Single move convenience: You only have to move once, directly from your old home to the new one.
- Ease of home preparation: You can prepare your old home for sale after moving out, enhancing its appeal to buyers.
- Potential payment flexibility: Some lenders in Houston may not require payments during the loan period.
- Quick action on ideal properties: You can quickly move on the right Houston property without worrying about your home’s sale status.
These benefits collectively make a bridge loan a practical choice for Houston buyers who need financial flexibility before selling their existing home, allowing them to settle the bridge loan with the proceeds from their sale.
What are the drawbacks of a bridge loan?
While bridge loans offer valuable benefits, they also come with certain drawbacks that are important to consider:
- Additional loan costs: Expect to pay underwriting fees, origination fees, and other associated costs with a bridge loan.
- Increased financial burden: Managing payments for up to two mortgages plus a bridge loan can add significant financial stress.
- Stricter qualification criteria: Qualifying for a bridge loan can be more challenging than a traditional mortgage loan.
- Slower underwriting process: The underwriting for a bridge loan may take longer than expected, potentially delaying your plans.
- Equity requirement for qualification: Lenders will assess the equity in your current home; owning more than 80% of its value could disqualify you.
When considering a bridge loan, these factors should be carefully weighed, as they can impact your immediate financial situation and ability to secure the loan.
When is a bridge loan a good solution?
A bridge loan might not be the right fit for every real estate situation, but it can be a valuable solution in certain scenarios, especially when easing the transition between selling and buying homes:
- You need the equity from your current home for a new home’s down payment.
- You can’t afford a double move and interim housing, or bridging the sale and purchase timelines is crucial.
- Your dream home just hit the market, and you want to act fast to avoid competitive delays.
- Your offer’s home sale contingency has been a deal-breaker, and you need immediate purchasing power.
- You can prepare or stage your current home for sale while still living in it, which can often be more lucrative and convenient. Selling an empty or professionally staged home can significantly increase appeal and market value.
What’s required to get a bridge loan in Houston?
To qualify for a bridge loan in Houston, you typically need to meet the following criteria:
- Qualifying income: Lenders will assess your income to ensure you can manage payments on your current mortgage, new mortgage, and bridge loan payments.
- Sufficient equity: Having at least 20% equity in your current home is essential. Some lenders may require up to 50%.
- Good credit history: A credit score above 650 is usually necessary, though requirements can vary. A higher score can result in better terms.
- Current home listed for sale: Some lenders may need proof that your home is on the market, ensuring its sale within the bridge loan term.
How much does a bridge loan cost in Houston?
The cost of a bridge loan in Houston typically exceeds that of a standard mortgage. You can expect interest rates to be about 1-3 percentage points higher than those for a conventional mortgage loan. Additionally, bridge loans often include various transaction fees.
This higher cost is due to the increased risk for lenders, given the uncertainty of when your current home will sell. It’s crucial to be financially prepared to pay both your mortgage and bridge loan simultaneously, in case your home doesn’t sell within the expected timeframe.
The specific rate you’ll be offered depends on your credit score and the lender you choose.
How to reduce bridge loan costs
One way to potentially reduce costs is by applying for a bridge loan with the same lender handling your new mortgage. This could eliminate the need for separate underwriting or other mortgage-related fees, as your bridge loan and new mortgage will be processed together.
It’s also important to shop around and compare options. Remember, bridge loans are meant as a short-term solution. Assess each option not just by total cost but also by convenience and suitability for your situation. Further financing options will be discussed later in this article.
Budget for closing costs
Besides the loan, you’ll need to budget for closing costs and various legal and administrative fees. These costs typically range 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
Understanding these costs upfront can help you better prepare financially for the bridge loan process in Houston.
Bridge loan cost example
Below is an example of how much a $200,000 bridge loan might cost, along with possible fees.
You find a home you’d like to purchase, but you’re still waiting for your current Houston house to sell. The asking price for the new home is $300,000. You can only come up with $100,000, but you have at least another $200,000 worth of equity in your current property. You want to access that money to cover the shortfall before selling your new home to another buyer.
| Net loan amount | $200,000 | $200,000 |
| Interest (varies) | 10% (example for 6 months) | $10,000 |
| Origination fee | 1.5% | $3,000 |
| Underwriting fee | $1,000 | $1,000 |
| Appraisal fee | $700 | $700 |
| Closing cost* | 2% | $4,000 |
| Total repayable amount | $218,700 |
*These closing costs typically range between 1.5%-3%
How Much Is Your Houston Home Worth Now?
Get a near-instant real estate house price estimate from HomeLight for free. Our tool analyzes the records of recently sold homes near you, your home’s last sale price, and other market trends to provide a preliminary range of value in under two minutes.
Who provides bridge loans in Houston?
In Houston, the availability of bridge loans might be more limited compared to other loan types due to their specific underwriting requirements. If you’re considering applying for a bridge loan, exploring options with various lenders is wise. The most common sources for bridge loans in Houston include:
- Your mortgage lender: Many lenders offer bridge loans, especially for existing customers.
- Local banks: Banks often provide bridge loans, offering personalized service.
- Credit unions: Member-focused credit unions in Houston may have bridge loan options with favorable terms.
- Hard-money lenders: These lenders offer loans based on property value rather than creditworthiness, useful for urgent financing needs.
- Non-qualified mortgage (non-QM) lenders: These lenders cater to borrowers who don’t fit traditional lending criteria.
Modern real estate companies also play a role in facilitating bridge loans, offering integrated services that simplify the process of securing financing while buying and selling homes in Houston. More on this will be discussed later in this post.
Are there alternatives to bridge loans in Houston?
While a bridge loan might not work for every Houston homeowner’s unique situation, there are alternatives to consider:
- Home equity loan: This kind of loan (sometimes called a HEL) allows you to borrow money using the equity in your home as collateral. Interest rates for a home equity loan can be more expensive than your current rate on your first mortgage, but instead of completing a cash-out refinance (paying off the first mortgage and borrowing cash), you can just borrow the money you need at the higher interest rate and leave your first mortgage of at its lower rate.
- Home equity line of credit (HELOC): Another option to use your existing equity is a HELOC. This lets you pull money out of your property for a relatively low interest rate. Instead of receiving the money immediately, your lender will extend a line of credit for you to borrow against. You might, however, have to pay an early closure fee if you open this line of credit and close it very soon after. Unlike a home equity loan, HELOCs typically have adjustable interest rates.
- Cash-out refinance: This type of loan lets you pull cash out of your home while refinancing your previous mortgage at the same time. Interest rates are typically higher for these kinds of loans than regular refinances but lower than bridge loans. This is not a solution for everyone, though. For example, you cannot do two owner-occupied loans within one year of one another. You might have to wait longer to finance your new purchase with an owner-occupied mortgage using the cash from your cash-out refinance.
- 80-10-10 (piggyback) loan: This option is called a piggyback loan because you would be taking a first mortgage and second mortgage out at the same time to fund your new purchase — this means that you would only need 10% down. For buyers who can’t make as large of a down payment before selling their previous home, this could be a solution that helps them avoid the cost of mortgage insurance. You would, however, still be carrying the cost of three mortgage payments until you sell your current home and can pay off the second mortgage.
- A 401k loan: Borrowing against your retirement account has some benefits and drawbacks — your repayment period will be relatively short (up to 5 years), and your monthly payment will likely be high. This could affect your ability to qualify for your new mortgage, as your lender must include this monthly payment when calculating your debt-to-income ratio. If your 401k plan allows, you can borrow up to $50,000 for your new purchase.
Are there modern ways to buy a house before I sell?
With today’s technology, real estate solution companies like HomeLight incorporate bridge loans into convenient programs that streamline the process of buying and selling a house simultaneously in Houston. These “Buy Before You Sell” programs can provide a more complete “bridge” to help you successfully move to a new home, reducing stress and worry.
With your Houston 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. Check with your agent if HomeLight Buy Before You Sell is available.
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?
Here is how HomeLight’s Buy Before You Sell program works for home sellers in Houston:
- 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 cost or commitment is required.
- Buy your dream home with confidence: Once approved, you’ll have access to a portion of your equity in your current home. You can 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 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.
Benefits of Homelight Buy Before You Sell
- 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.
HomeLight’s Buy Before You Sell program offers a convenient and stress-reducing solution for Houston homeowners caught in the buy-sell conundrum. Learn more program details at this link.
HomeLight also offers other services for homebuyers and sellers in Houston, 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.
You might also try HomeLight’s Net Proceeds Calculator as you plan your home sale.
A creative financing solution for Houston homeowners
As Houston homeowners contend with a competitive housing market and elevated home prices, many are discovering that bridge loans offer a streamlined solution for balancing selling their current home with purchasing a new one.
Bridge loans allow you to leverage the equity in your previous home for your new purchase. This affords you more time to sell and alleviates much of the stress associated with synchronizing these two major transactions.
While bridge loans can be a highly convenient tool for navigating this transition, they come with additional costs and might not be suitable for everyone.
Consider exploring HomeLight’s Buy Before You Sell program for a more tailored approach. This innovative option reduces the uncertainty surrounding your next home purchase. Additionally, HomeLight can connect you with a top-performing Houston real estate agent who is experienced in handling bridge loans and other alternative financing solutions.
Header Image Source: (Daniel Lee / Unsplash)
