Bridge Loans in California: How to Unlock Home Equity to Buy Before You Sell

What are the drawbacks of a bridge loan?

There are a number of factors to consider before you commit to bridge loan financing. Always read the fine print and evaluate all costs and terms with a trusted loan advisor before making a decision. Here are some of the drawbacks of bridge loans:

The cost

When adding up all of the expenses of buying and selling a home, the cost of a bridge loan, on top of everything else, can seem daunting. However, you are paying for the convenience and ease that a bridge loan provides — and it comes at a premium.

Daunt shares that with the bridge loans she offers at Treehouse Mortgage Group, this fee comes out to 2% of the bridge loan amount. Other California lenders might charge more or less for this kind of loan, but 2% is typical. So, for a bridge loan of $200,000 to put toward your down payment on your new purchase, this would be a cost of $4,000.

Interest rates for bridge loans are also typically higher than those for traditional mortgages, due to the short-term nature of these loans.

Qualifying for them can be difficult

Your lender will need to evaluate all of your monthly payments to determine if you can afford your mortgage payment for your new home purchase. And unfortunately, they might need to factor in your payment on your departing residence if it has yet to be sold or is not under contract to be sold.

Unless you have sufficient monthly income to cover both mortgage payments according to your specific lender’s guidelines, you might not qualify for this kind of financing. However, these policies are in place to protect both the lender and you as the consumer to avoid getting stuck with two payments that you might not be able to afford.

In addition to your monthly income, lenders will also review the amount of equity you have in your departing residence to determine how much you are qualified to borrow. If you owe more than 80% of your current home’s value, you may not qualify.

When might I need a bridge loan in California?

With demand slowly increasing in California’s market as mortgage rates eventually cool off, buyers can expect increased competition for homes, especially with California’s housing shortage limiting inventory. Bridge loans give homeowners more flexibility in their house-hunting endeavors because they allow them to make offers non-contingent on selling their previous home; this can be an asset in a competitive market.

Bridge loans are also more common in California than you might think. Lopez estimates that in the offers he has seen in San Diego in the past three years, 15% to 20% of those came from buyers taking advantage of bridge loans.

Some examples of when a bridge loan might be a solution include:

• You won’t have money for a down payment until you sell your current home, aka your equity is tied up in your house.
• You only want to move once — instead of selling your home right away before you buy your new one, you want to buy first and move directly from your previous home to your new one (and save on time and hassle).
• You’ve selected a new home and don’t want to risk losing it to another buyer. In more competitive markets, you need to act quickly.
• You aren’t able to close the sale of your existing home before closing on your new home.
• You’ve made an offer, but the seller won’t accept a home sale contingency.
• You are unable to get your home ready to sell while still living in it, or you need to make some more difficult renovations to maximize your sale price.

What’s required to get a bridge loan in California?

Because mortgages are regulated at both a federal level and a state level, there are protections in place to avoid discriminatory and predatory lending practices. That being said, the requirements to get a bridge loan in California are dependent on each borrower’s unique situation. Most California lenders will evaluate the value of your current home compared to your current mortgage payment, the value of the home you would like to purchase, your credit score, your income, your monthly debt payments, and your assets, at a minimum.

Because bridge loans are considered “temporary,” they are typically exempt from some of the lending rules that govern loans in all states, including California. Most notably, certain Regulation Z rules prohibit “balloon payments’” on high-cost mortgages, and limit the total costs that a lender can charge in interest and fees. It is always best to do your research and consult with an expert advisor before considering this kind of financing.

How much does a bridge loan cost in California?

As noted above, bridge loans are not cheap. A 2% premium is common for this kind of financing, but it varies widely between lenders. If you are applying for a bridge loan with the same lender as with your new mortgage, you won’t likely need to pay for extra underwriting or other mortgage fees as your bridge loan and new mortgage will be underwritten and approved at the same time.

Interest rates for bridge loans are typically higher than those for traditional mortgages, however. Your rate will likely depend on your creditworthiness and the type of lender, but as of 2024, Daunt shared the current going rate at her company of 7.49% (with a traditional bank). North Coast Financial in Oceanside, California, however, estimates average rates of between 9.5% and 10.95% with a hard-money lender. Compared with the current average 30-year fixed mortgage rate (May 2024) of 6.94%, bridge loans can be significantly more expensive.

Who provides bridge loans in California?

Not all lenders are created equal. Some institutions will be more focused on residential lending, while others will be a better choice for investors and businesses. Here are the most common sources for bridge loans:

• Traditional mortgage lenders (usually in conjunction with a first mortgage)
• Credit unions
• Hard-money lenders (also known as private money lenders)
• Non-qualified mortgage (non-QM) lenders

Are there alternatives to bridge loans in California?

While a bridge loan might not work for every homeowner’s unique situation, there are alternatives to consider:

• Home equity loan: This kind of loan lets a homeowner take their existing equity out of their home’s value in the form of a lump sum payment. 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 for, say, $400,000 at 5% (paying off the first mortgage and borrowing cash), you can just borrow the $100,000 you need at a 6% interest rate and leave your first mortgage of $300,000 at its lower rate of 3%.
• Home equity line of credit (HELOC): Another option for homeowners to use their existing equity in their current home, HELOCs allow a borrower to pull money out of their 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, Daunt says.
• Cash-out refinance: This type of loan lets borrowers pull cash out of their home while refinancing their 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. “You cannot do two owner-occupied loans within one year of one another,” Daunt says. 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 need only 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 DTI ratio. If your 401k plan allows, you might be able to borrow up to $50,000 to put toward your new purchase.

Are there companies in California that can help me buy a house before I sell?

In today’s market, there are companies like HomeLight that provide solutions for California homeowners stuck in the tricky situation of needing to buy a home before they sell their old one. These companies incorporate bridge loans to close the gap between your two homes to take the stress out of moving.

HomeLight’s Buy Before You Sell program, available in California, does just that. This program allows you to purchase your new home and move in while getting assistance to sell 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?

Here is how HomeLight’s Buy Before You Sell program works for home sellers in California:

1. Unlock equity from your home with ease

HomeLight will evaluate your California property for the program and, if approved, let you know how much of your equity you can unlock for the purchase of your new home. If approved, you can use the equity unlock amount for the following:

• The down payment on your new property
• Moving expenses
• Closing expenses
• Property repairs

2. Buy your dream home with confidence — and without a double move

You and your agent will be able to make a strong offer on your new home without a home sale contingency. You can keep your life plans moving forward and avoid the hassle and expense of moving twice.

3. Maximize the sales price of your current home

Your agent will list your California home on the market to attract the strongest offer possible. By listing it vacant and potentially staged, your agent will be better able to attract the strongest offer possible.

Note: Check with your agent about availability and pricing in your market.

A creative financing solution for California homeowners

As California homebuyers navigate a challenging market with low supply and high home prices, 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 — and while you’re at it, HomeLight also offers other solutions for simplifying your real estate journey, such as Agent Match, a free service to find the top-performing real estate agents in your market, and Simple Sale, which can provide you with a no-obligation cash offer for your home within 24 hours and close in as few as 10 days.

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