How Do I Get a Buy Before You Sell Mortgage? (Bridge Loan)

Understanding the ‘buy before you sell’ dilemma

Moving into a new home is exciting but can also be complicated, especially when you’re selling your current home while buying a new one. The idea of “buy before you sell” often raises many questions and concerns for homeowners. Let’s break down this challenge and explore how it can be managed.

Why buying and selling at the same time can be challenging

Buying a new house while selling your current one sounds simple on paper, but in practice, it’s a tightrope walk. Here are the two main challenges homeowners face:

1. Timing conundrum: It’s a rare occasion when the sale of your existing home and the purchase of your new one sync up perfectly. Often, there’s either a gap where you’ve bought the new house but haven’t sold the old one, or you’ve sold your existing home and haven’t yet secured your next one. This misalignment can lead to scenarios where you’re temporarily homeless or carrying the financial burden of two homes.
2. Financial juggling: Most homeowners rely on the proceeds from the sale of their current home to finance the purchase of their next. When these two transactions don’t align, it can create financial strain. You might find yourself in a situation where you’re expected to make a down payment on the new home while still paying the mortgage on your current home. This juggling act can put pressure on your finances and increase stress during what should be an exciting time.

Why navigating a mortgage can be tricky

When you’re buying a new home while selling your current one, you’re working to pay off your existing mortgage through the sale while preparing to take on a new mortgage for your next home. Coordinating both transactions can create financial and logistical challenges, especially when their timelines don’t line up. Here are some specific challenges:

What is a bridge loan, and how can it help?

To navigate these challenges, a smart strategy is essential. Enter bridge loans. This financial tool serves as a lifeline, helping you bridge the gap between selling your current home and buying a new one. What exactly is a bridge loan, and how can it help smooth out this transition?

Bridge loan definition

A bridge loan is a short-term loan designed to provide homeowners with immediate funds needed for the purchase of a new home before selling their current property. Here’s a quick breakdown:

• Essence of bridge financing: Think of it as a temporary financial bridge. It “bridges” the gap between the time your old home sells and the new home purchase, ensuring you have the funds necessary to clinch the deal on your dream home.
• Timeframe and typical terms: Bridge loans are short-term loans, typically lasting from six months to a year, though terms can be extended based on your financial situation and the lender’s policies. Because of their temporary nature and the higher risk involved, they usually have slightly higher interest rates compared to traditional mortgages.

Bridge loan advantages

If managed properly, bridge loans can offer a range of benefits to homeowners facing the conundrum of buying before selling:

• Eases the financial strain of double mortgages: A bridge loan can prevent you from juggling two mortgages simultaneously. Instead, you’ll have the bridge loan and the mortgage on your old home until it sells.
• Offers flexibility in the timing of your home sale and purchase: With the funds from a bridge loan, you’re not pressured to accept a low-ball offer on your current home out of desperation. It provides the freedom to wait for an offer that meets your expectations.
• Allows homeowners to act quickly: In a hot real estate market or with a coveted property, a home can get snatched up rapidly. A bridge loan ensures you have the finances to make a competitive offer without waiting for your old home to sell.

How to get a bridge loan

It’s easy to see why bridge loans are appealing, especially if you’re trying to move from one home to the next without the chaos. But getting one isn’t as simple as checking a box. Like any financial move, there are steps, requirements, and a few things to think through. Here’s what to expect when you’re trying to secure a bridge loan:

Qualifying for a bridge loan

Before you can benefit from a bridge loan, lenders will need assurance that you’re a good candidate. Basically, they’re checking that you’re financially steady enough to manage the in-between phase.

»Learn more: Stuck wondering why your home isn’t getting offers? Use our reason randomizer to quickly pinpoint potential issues and get back on track.

Applying for a bridge loan

Getting a bridge loan is similar to applying for a traditional mortgage, but there are some key differences to keep in mind:

• Required documents: Both bridge loans and traditional mortgages require proof of income, employment verification, a credit report, and details about the homes involved. However, bridge loans might demand more detailed information about the timing of your home sale and purchase, as well as your ability to handle both mortgages temporarily.
• Timeline: The application process for bridge loans is generally faster than for traditional mortgages because they’re short-term and need to be arranged quickly to facilitate the purchase of a new home. However, the exact timeline can still vary depending on the lender and how promptly you provide the required documents.
• Interest rates, fees, and other costs: Bridge loans typically have higher interest rates compared to traditional mortgages due to their short-term nature and increased risk. Many lenders set bridge loan rates at or above the current prime rate, which is the rate at which banks lend to customers.

How a buy-before-you-sell program works step-by-step

About 14% of lenders report receiving frequent inquiries about buy-before-you-sell programs, while another 40% say borrowers ask about this option from time to time. They make it easier to buy your next home without having to worry about selling your current one first. Instead of juggling showings, packing, and two home transactions all at once, you get more breathing room to figure things out.

Here’s a quick, step-by-step look at how these programs work and what to expect along the way.

Example of using a bridge loan

Imagine your current home is worth $400,000, and you owe $200,000 on your mortgage. You want to buy a $300,000 house but need to sell your current home first.

With a bridge loan, you could borrow up to 80% of your home’s value, which is $320,000. If you owe $200,000, you might take a bridge loan for $120,000 (80% of your home’s value minus your current mortgage), which can be used for the new home’s down payment and closing costs.

Alternatively, you could take the full $320,000, pay off your current mortgage, and use the remainder for the new home.

Once your home sells, you repay the bridge loan. Any leftover funds can be used to pay down the new mortgage or for other purposes, such as home improvements or savings.

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How much does a bridge loan cost?

While bridge loans offer a good financing tool when you’re buying and selling at the same time, they’re not exactly cheap. Because they’re short-term and a bit riskier for lenders, the costs tend to be higher than a traditional mortgage.

Here’s what you’ll typically pay:

• Interest rates: These are usually higher, often landing around 8% to 12% of the loan, depending on your finances and the market. Some are variable, so they can change over time.
• Origination fees: This is the lender’s service fee for processing and setting up your loan. It’s typically 1% to 3% of the loan amount, paid upfront.
• Closing costs: These cover the services and paperwork needed to finalize the loan, such as title searches, title insurance, and escrow services. Similar to a regular home loan, these usually add up to about 2% to 5% of the loan amount.
• Appraisal fee: This covers the cost of having a professional appraiser assess your home’s market value. Your lender will likely require a home appraisal, which can cost $300 to $700 or more.
• Prepayment penalties: Some lenders charge a fee if you pay off the loan early, but not all do, so it’s important to ask before committing.
• Overlapping homeownership costs: This is the big one people sometimes overlook. You may be covering two mortgage payments, plus taxes and insurance, until your current home sells.

Bridge loans can be incredibly useful in the right situation, but it’s important to go in with eyes wide open about the costs, especially if your home takes longer to sell than expected.

How real estate market dynamics affect financing options

Choosing the right financing strategy depends heavily on the conditions of your local market. In a strong seller’s market where homes sell quickly, a bridge loan can be a powerful tool that gives you an edge. It provides the liquidity to secure your next home, allowing you to make a competitive offer without a sale contingency, and with confidence that your current property won’t linger on the market.

Conversely, in a buyer’s market, the risk associated with a bridge loan increases. If your home takes longer than anticipated to sell, you could be carrying the costs of the loan for an extended period, adding significant financial pressure.

Before committing, it’s wise to consult with a top real estate agent who can provide data-backed insights on average days on market and sale prices in your neighborhood. This will help you determine if a bridge loan fits your timeline and financial comfort level.

What are some alternatives to bridge loans?

Bridge loans can be expensive, and in a slow housing market, selling your current home quickly enough to pay one off isn’t always guaranteed. If the costs and risks make a bridge loan less appealing, you don’t have to give up on buying your next home before selling your current one. Here are some alternatives worth considering.

HomeLight’s Buy Before You Sell program

If a traditional bridge loan feels too expensive or risky, HomeLight’s Buy Before You Sell program is another option worth exploring. In fact, a survey found that 74% of lenders recommend the program to clients who want an equity-based solution for buying and selling a home at the same time.

HomeLight designed this option to make the transition easier by helping reduce the stress, upfront costs, and uncertainty that often come with coordinating two home transactions. Watch the video below to learn how HomeLight’s Buy Before You Sell works.

What is the Buy Before You Sell program?

HomeLight’s program helps you buy your next home without having to sell your current one first. Instead of worrying about selling your house before making your next move, you get the flexibility to find and secure your new home on your own timeline. Here’s a quick look at how the program works and what you can expect:

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 commitment is required. Our near-instant equity unlock calculator lets you estimate how much equity we can unlock from your current home.
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 on a new home with no home sale contingency at any time, regardless of how long it takes to find your dream home.
3. Sell your current home with peace of mind: After you move into your new home, you 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.

HomeLight’s Buy Before You Sell program, with its near-instant equity unlock calculator, is available in most states. To learn more, visit homelight.com/buy-before-you-sell.

Navigate your next home purchase with confidence

Whether you’re looking at the flexibility of a bridge loan, exploring alternative financial solutions, or considering HomeLight’s Buy Before You Sell program, there are several ways to simplify this often-complex buying-while-selling process.

HomeLight also offers other solutions for simplifying your real estate experience, such as Agent Match, which helps you find the top-performing real estate agents in your market, and Simple Sale, which provides you with a no-obligation cash offer for your home in as few as 24 hours and lets you close in as few as 7 days.

Remember, the best solution is the one that fits your situation, budget, and goals. Whichever path you take, here’s to landing at the doorstep of your dream home.

Editor’s note: This post is for educational purposes only. If you need assistance with a bridge loan or “buy before you sell” mortgage, reach out to your own advisor.

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