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How the Bridge Loan Process Works in California
Buying and selling a home in California at the same time can be complicated, especially when it comes to financing.
Thankfully, there are several mortgage products available that can help you purchase a new home before selling your current one. And the bridge loan is one of them.
Summary: This guide explains what a bridge loan is, who can benefit from using one, and how the bridge loan process works in California.
What Is a Bridge Loan, Exactly?
A bridge loan is a short-term loan that helps homeowners bridge the gap between selling their current home and buying a new one. It provides funds that can be used to cover the down payment or purchase price of the new property.
In California, bridge loans are typically based on the equity you have built up in your current home. They offer a short term, usually ranging from 6 months to 1 year.
The repayment process can be structured with interest-only payments or deferred until the current home sells. But this can vary, so you’ll want to inquire about it upfront.
Bridge loans are commonly used by:
- Homeowners who have to purchase a new home before their current one sells.
- Individuals in a fast-moving real estate market who want to make non-contingent offers.
- Real estate investors acquiring properties with quick closing timelines.
In short: Bridge loans can be ideal for borrowers with solid credit and significant equity. But they often have higher interest rates and fees compared to traditional loans. So they’re best suited for short-term needs.
Advantages of Using a Bridge Loan to Buy a Home
For many homeowners, the advantages of using a bridge loan to buy the next house far outweigh the higher costs. So let’s talk about the benefits of this strategy:
1. You’ll only have to move once.
Instead of selling your current house and moving into a rental property, a bridge loan allows you to stay in your current home until you’ve purchased the next one. So you only have one move to make, as opposed to two. This is a major advantage, when you consider what a hassle moving can be.
2. You can make a stronger offer.
A California bridge loan can also help you make a stronger offer. Without this extra financing, you might have to make your offer contingent upon the sale of your current home. And this kind of strategy could work against you, especially in a competitive real estate market.
When sellers receive multiple offers, they tend to choose one with the fewest contingencies. After all, a home sale contingency can make a real estate transaction more unpredictable. So a seller might shy away from them. With a bridge loan, you can make a non-contingent offer with fewer “strings attached.”
3. You can start house hunting sooner.
If you choose to sell your current house before buying the next one, you might not be able to start house hunting until the property sells. This could delay your next purchase by weeks or even months. As a result, you might end up paying more for the next house due to rising home prices and/or mortgage rates.
A bridge loan gives you more flexibility and allows you to start house hunting just as soon as you obtain funding. That way, you could get ahead of rising prices and expedite your purchase. Once your previous home sells, you could then pay off the bridge loan with the proceeds.
How the Process Works in California
The first thing you should know is that this process can vary from one homeowner to the next. That’s because there are many variables involved.
You’re essentially managing two different real estate transactions at nearly the same time, buying a new home while also trying to sell your current one.
Despite these variables, the bridge loan process in California typically works like this:
Step 1: Get pre-approved for a loan
Getting pre-approved for a bridge loan is similar to getting pre-approved for a traditional mortgage.
You will need to provide documentation such as your income, credit score, and information about the properties involved in the sale. Your lender will use this information to determine how much you can borrow and what your interest rate will be.
Many lenders use a combined loan-to-value (CLTV) ratio of around 80% when determining the maximum amount for a bridge loan. This means they’ll consider the total value of both your current home and the one you plan to buy, and the loan amount will typically not exceed 80% of that combined value.
Getting pre-approved by a lender can help you identify the specific amount you’re able to borrow.
Step 2: Make an offer on a new property
When making an offer on a new home, you might want to include a contingency that states the sale is dependent on you selling your current home. This gives you some protection in case your current home does not sell within the timeframe specified in the contract. These types of real estate contingencies are not required, but it’s something worth considering.
Step 3: Close on the new home
Once your offer is accepted and financing is in place, you can close on the new home. The funds from the bridge loan can be used to cover the down payment and closing costs for the new property.
Step 4: Sell the old home and repay the bridge loan
With your new house purchased and the bridge loan in place, you can start the process of selling your current home. Try to price your home competitively based on recent sales in the area, and consider working with an experienced listing agent.
Keep in mind that the timeline for selling your home can be unpredictable, so it’s important to have a backup plan in case the sale takes longer than expected.
Once your house sells, the proceeds from the sale can be used to repay the bridge loan in full. At this point, you have successfully bridged the gap between buying a new home and selling your current one!
Common Mistakes to Avoid
While a bridge loan can be a useful tool for buying a new home before selling your current one, there are some mistakes you’ll want to avoid along the way.
1. Failing to plan for the worst-case scenario
One of the biggest risks of using a bridge loan is that your current home may not sell as quickly as you anticipated. If this happens, you may be stuck with two mortgage payments and a higher debt load than you can handle.
To avoid this mistake, it’s important to plan for the worst-case scenario and have a backup plan in place. This might include renting out your current home temporarily or securing additional financing to cover the bridge loan.
2. Not knowing or overestimating your property value
When applying for a bridge loan, your lender will typically use your current home’s value as collateral. If you overestimate your home’s value, you may not be approved for the full loan amount you need.
To avoid this, you might want to consider having your current property appraised to determine the market value. Your lender will also order an appraisal, but you could do one on your own to find out where you stand. This is another optional step that’s at least worth considering.
3. Not having a clear plan for selling your current home
Selling your current home is a critical step in repaying your bridge loan. If you don’t have a clear plan for doing this, you might experience delays that could affect your ability to repay the bridge loan.
To avoid this, you can work with an experienced listing agent and set a realistic timeline for selling your current home. It also helps to price the property competitively based on recent, comparable sales in the area. This will help expedite the sale.
Want to explore your options? We’re here to help! Please contact our knowledgeable staff if you need assistance with a bridge loan in the state of California.
