What's a Bridge Loan and Do They Still Exist?

Looking to move up but the down payment's an issue? Bridge loans in their traditional form can be both pricey and hard to obtain. BUT - "Buy Now, Sell Later" programs (high loan to value home equity lines of credit) fulfill the same function. In other words: they can be a much cheaper path to successfully buying a home before selling your existing one. 

The "Buy Before You Sell" scenario is ideal for most buyers, because it allows them to get up and out of their current place before putting their house on the market. After all… living in a home that's for sale is no picnic! Nor is it ideal for maximizing the sales price. 

These loans are ideal for move-up buyers who: 

• Have their downpayment "locked up" in equity in the current home

• Want certainty about where they're going to live before committing to a sale

• Prefer not to sell equities, crypto, etc. in order to fund the downpayment for a purchase

For a few years, lending guidelines were very tight and bridge loans were hard to come by. But now there is more availability and guidelines at some lenders have become more flexible. Our partners at Redwood Credit Union are closing these loans frequently, sometimes in as few as 14 days. 

How does it work?

The basic idea is that you buy your new place using the bridge loan, move in, and then sell your outgoing residence. After closing, the proceeds from the sale are deployed to restructure your financing on the new home into a conventional mortgage. 

Using this program you can get into your new place with just 10% down payment out of pocket. (Although 20% down, as always, means better pricing, and everything is subject to qualifications based on credit score and other factors). 

There are many differences between these loans and a traditional HELOC or mortgage. For example, more flexible guidelines allow the lender to qualify a buyer for BOTH the existing and the new mortgage. They may allow for as much as an 80% debt to income (DTI) ratio on both mortgages combined, knowing that carrying two mortgages is only a temporary situation. 

Of course there are too many lending guidelines and details to cover here. Bottom line: If you'd like to move up but are feeling stuck in the logistics, please get in touch. This is a problem we help folks solve every day! 

To get into the nitty gritty of bridge loan underwriting, contact Kathy Chang at Redwood Credit Union. 

More details on terms from Kathy***: 

RCU offers our “Buy Now Sell Later Program” that allows buyers to spend a much higher percentage of their gross income on debts, including their current(departure home) PITI/HOA up to 80% as compared to more typical 43% max debt ratio.

A listing agreement is required showing intention to sell the departure home after moving into their new home.

RCU allows a heloc up to a max CLTV of 85% of the value of departure home minus 10% to account for transaction fees as a seller

The difference between 85% and the current loan balance may be used towards the down payment

Buyers should consider borrowing against retirement funds or their stock portfolio(margin loans) if they do not want to disrupt their investments nor pay cap gains taxes

***As always, availability and pricing is subject to underwriter review and borrower qualifications including income, credit score, etc. This is not a commitment to lend.