Bridge Loans in Los Angeles: 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.
Dealing with the real estate market in Los Angeles can feel impossible, especially when selling your current home while purchasing a new one.
It’s an incredibly common scenario, and you might think your only option is to sell your home, temporarily relocate, and then wade through L.A.’s cutthroat real estate market to find your dream home.
However, there’s one solution you likely haven’t considered: a bridge loan. This short-term financial tool bridges the income gap, allowing you to purchase your new Los Angeles home before selling your existing one.
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 Los Angeles, HomeLight encourages you to reach out to your own advisor.
What is a bridge loan, in simple words?
Say you’ve found your dream home in Los Angeles, but there’s a catch: you have to sell your current home to finance the purchase. This is where a bridge loan, also known as a swing or bridging loan, becomes your financial bridge.
A bridge loan is a short-term loan that taps into your existing home’s equity, providing you with the necessary funds to make a down payment and cover closing costs on your new home. Though bridge loans carry higher costs than traditional mortgages, they offer unparalleled speed and convenience.
How does a bridge loan work in Los Angeles?
Imagine you’ve found a new home you’re dying to purchase, but your current one hasn’t sold yet. Using the equity from your previous home, a bridge loan can help you cover the down payment and closing costs for your new Los Angeles abode so you don’t lose the home to another buyer.
Usually, the lender working on your new mortgage will also manage your bridge loan. They usually require that your current home is on the market and listed for sale and will offer the bridge loan for a period ranging from six months up to a year. Ideally, this provides a cushion, allowing you to transition without the immediate sale of your old home.
One major factor your lender will consider is your debt-to-income ratio (DTI). This will include the ongoing mortgage payments on your current Los Angeles home, the payments for the new property, and any interest-only payments on the bridge loan.
However, if your current home is under contract with a buyer who has secured loan approval, lenders might only consider the mortgage payment of your new home in the DTI equation.
This check is primarily done to remind the lender that you can handle the financial responsibility of both properties, especially if your current home takes longer than anticipated to sell.
What are the benefits of a bridge loan in Los Angeles?
Bridge loans offer several advantages that make navigating the Los Angeles real estate market more flexible for homebuyers:
- Make a non-contingent offer: With a bridge loan, you can present a stronger, non-contingent offer on your new home, strengthening your buying position.
- Single move convenience: You only need to move once, directly from your old home to the new one, avoiding temporary housing.
- Time to prepare your old home: After relocating, you can prepare your old home for sale, possibly increasing its market value.
- No immediate loan payments: Some lenders offer a period where no payments are required on the bridge loan, easing financial pressure.
- Swift action on ideal properties: A bridge loan allows you to quickly move on a property without being hindered by the sale status of your current home.
- Opportunity for better staging: With more time and space, you can create better staging of your old home, potentially attracting higher offers.
What are the drawbacks of a bridge loan?
While a bridge loan can be a strategic move in the Los Angeles housing market, it’s important to weigh its potential drawbacks:
- Additional loan costs: Expect underwriting fees, origination fees, and other costs associated with bridge loans.
- Financial stress from multiple payments: Juggling two mortgage payments and a bridge loan can be financially demanding.
- Challenging qualification criteria: Securing a bridge loan often requires stricter qualifications than traditional mortgage loans.
- Slower underwriting process: A bridge loan’s approval and underwriting process may take longer than anticipated.
- Equity-dependent borrowing limit: The amount you can borrow is tied to the equity in your current home. Limited equity could restrict your loan options.
- Risk of market changes: If the real estate market shifts unfavorably, you may face challenges in selling your home at the desired price.
When is a bridge loan a good solution?
A bridge loan isn’t the right fit for everyone, but it can be a boon in the right situation:
- You need the equity from your current home for a down payment on your new home.
- You can’t afford to move twice, or lining up the sale and purchase timelines isn’t possible.
- Your dream home just appeared on the market, and you want to act fast to avoid another buyer swooping in.
- Your offer’s home sale contingency has been a negotiation hurdle, and you want some purchasing leverage.
- You want to sell a vacant or staged home, which can often net more profit.
What’s required to get a bridge loan in Los Angeles?
To qualify for a bridge loan in Los Angeles, you typically need the following:
- Qualifying income: Lenders will assess your income to verify that you can manage payments on your current mortgage, your new mortgage, and potentially an interest-only payment on the bridge loan.
- Sufficient equity: You need at least 20% equity in your current home, though some lenders may require as much as 50%.
- Good credit history: A favorable credit score, usually above 650, is required. This score impacts your interest rate and other factors like loan-to-value ratio. A higher score will offer better terms.
- Home listed for sale: Some lenders may need evidence that your current home is on the market, ensuring its sale within the bridge loan term.
How much does a bridge loan cost in Los Angeles?
A bridge loan in Los Angeles typically carries a higher interest rate than a standard mortgage, often ranging from 1-3 percentage points above conventional mortgage rates. Additionally, bridge loans may include various transaction fees.
This increased cost is due to the higher risk associated with bridge loans for lenders. As a borrower, it’s vital to consider the possibility of your current home not selling within the expected timeframe. In such cases, you should be financially prepared to simultaneously handle the mortgage and bridge loan payments.
Your specific interest rate will largely depend on your credit score and the type of lender you choose.
How to reduce bridge loan costs
One strategy to potentially lower bridge loan costs is applying for it through the same lender managing your new mortgage. This can often eliminate the need for separate underwriting or additional mortgage fees, as your bridge loan and new mortgage will be processed together.
It’s also advisable to compare different lenders and bridge loan options. Remember, bridge loans are intended as a temporary solution, so choosing a financing option that suits your specific needs is crucial, balancing total costs with convenience and suitability for your situation.
Budget for closing costs
In addition to the loan, closing costs, legal and administrative fees are part and parcel of obtaining a bridge loan. These expenses 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
Bridge loan cost example
Below is an example of how much a $300,000 bridge loan might cost, along with possible fees.
You find a home you’d like to purchase but still wait for your current Los Angeles house to sell. The asking price for the new home is $900,000. You can only come up with $600,000, but you have at least another $300,000 worth of equity in your current property. You want to access that money to cover the shortfall before your new home is sold to another buyer.
| Net loan amount | $300,000 | $300,000 |
| Interest (varies) | 10% (example for 6 months) | $15,000 |
| Origination fee | 1.5% | $4,500 |
| Underwriting fee | $1,000 | $1,800 |
| Appraisal fee | $700 | $700 |
| Closing cost* | 1.02% | $3,060 |
| Total repayable amount | $325,060 |
*These closing costs typically range between 1.5%-3%
How Much Is Your Los Angeles Home Worth Now?
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Who provides bridge loans in Los Angeles?
In Los Angeles, not every financial institution offers bridge loan products, primarily due to their specific underwriting requirements. Exploring options with various lenders is a good idea if you’re considering a bridge loan. The most common sources for bridge loans in Los Angeles include:
- Your mortgage lender: Your current mortgage lender may often offer bridge loans, especially if you have a positive history with them.
- Local banks: Many local banking institutions in Los Angeles provide bridge loans with varying terms and conditions.
- Credit unions: As member-focused organizations, credit unions in the area might offer more favorable terms for bridge loans.
- Hard-money lenders: These private lenders offer loans based on your property, not your creditworthiness.
- Non-qualified mortgage (non-QM) lenders: These lenders provide loans that do not meet the standard federal guidelines, including bridge loans.
Are there alternatives to bridge loans in Los Angeles?
While a bridge loan might not work for every Los Angeles 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 allows you to pull money out of your property for a relatively low interest rate. Instead of receiving the money all at once, 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 compared to regular refinances, but are lower than those for 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. This would mean that 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 comes with 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 will need to include this monthly payment when calculating your debt-to-income ratio. If your 401k plan allows, you might be able to borrow up to $50,000 to put toward your new purchase.
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 Los Angeles. 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.
With your Los Angeles 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 to see 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 Los Angeles:
1. 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.
2. 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.
3. 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.
For Los Angeles homeowners caught in the buy-sell conundrum, HomeLight’s Buy Before You Sell program offers a convenient and stress-reducing solution. Learn more program details at this link.
HomeLight also offers other services for homebuyers and sellers in Los Angeles, 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 Los Angeles homeowners
As Los Angeles homebuyers maneuver through a competitive housing market with high home prices, many are discovering the advantages of bridge loans.
Bridge loans offer a unique opportunity for homeowners to leverage the equity in their previous home for their new purchase. This provides valuable breathing room to sell without the pressure of perfectly timing the transactions.
Although bridge loans can be highly convenient, they come with their own challenges and may not be suitable for every homeowner.
For alternatives, consider HomeLight’s Buy Before You Sell program. It’s designed to reduce the uncertainty surrounding your next home purchase. Additionally, HomeLight can connect you with a top-rated Los Angeles buyer’s agent experienced in bridge loan transactions, ensuring you have expert guidance every step of the way.
Header Image Source: (Henning Witzel/ Unsplash)
