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

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.

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.