Bridge Loans in Washington, D.C.: How to Unlock Home Equity to Buy Before You Sell
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Joseph Gordon Associate EditorJoseph Gordon is an Associate Editor with HomeLight. He has seven years of experience reporting on the commercial real estate and insurance industries. He holds an MFA in Creative Writing from the University of San Francisco.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Are you a homeowner in Washington, D.C., trying to sell your old home while buying a new one? Finding the perfect balance between selling and buying can be tough in a market where inventory is low and prices are high. It can be difficult to juggle the timing and financial details when you’re pressed to sell before you can invest in your new home.
But what if there’s a way to make this process easier? Enter the bridge loan – a short-term financing option. Bridge loans allow you to purchase a new home before selling your current residence, alleviating pressure and uncertainty while unlocking the equity in your current home.
Yes, You Can Buy Before You Sell. Why Move Twice?
Through our Buy Before You Sell program, HomeLight can help you unlock a portion of your equity upfront to put toward your next home. You can then make a strong offer on your next home with no home sale contingency.
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 Washington, D.C., HomeLight encourages you to reach out to your own advisor.
What is a bridge loan, in simple words?
A bridge loan is a short-term loan that allows homeowners to manage the financial gap between selling their current home and purchasing a new one. It leverages the equity in your existing home, providing the money required for the down payment and closing costs for your dream home.
Bridge loans are great because they provide speed and convenience over traditional mortgages. They are also known by several other names, including bridge financing, bridging loans, interim financing, gap financing, and swing loans.
How does a bridge loan work in Washington, D.C.?
Imagine you’re a homeowner in Washington, D.C., and you’ve just found your dream home. The catch? You need to buy this new property before selling your current one. This is where a bridge loan comes into play, acting as a financial bridge between selling your old home and purchasing your new one.
You’ll use the equity from your previous home to cover the down payment and closing costs for your new home. Typically, the lender handling your new mortgage will also manage your bridge loan. The lender will typically mandate that your existing home is listed for sale first, and the bridge loan will be offered for a period between six months to a year.
Lenders will first consider your debt-to-income ratio (DTI). They consider the payments on your current mortgage, the payments for the new home you’re buying, and any interest-only payments on the bridge loan. However, if your old home is already under contract, and the buyer has secured loan approval, your lender might consider only the new mortgage payment in the DTI calculation.
The lender’s primary concern will be if you can comfortably handle payments for both properties, just in case your old home doesn’t sell immediately.
What are the benefits of a bridge loan in Washington, D.C.?
Bridge loans in Washington, D.C. offer several advantages:
- Make a non-contingent offer: With a bridge loan, you can make a non-contingent offer on your new home, which is often more attractive to sellers.
- Only one move required: You can move directly from your old home to the new one, avoiding temporary housing.
- Prepare your old home for sale: After moving out, you can prepare your old home and even consider staging to enhance its market appeal.
- Potential for no payments during the loan period: Some lenders may not require payments on the bridge loan for a certain period.
- Quick action on ideal properties: A bridge loan allows you to quickly pursue a property without the sale status of your current home delaying the process.
What are the drawbacks of a bridge loan?
While bridge loans can be a good option for handling the transition between homes, they come with drawbacks that you should keep in mind:
- Additional loan costs: Expect fees like underwriting and origination fees, adding to the total cost of the loan.
- Increased financial burden: Covering the payments for two mortgages and a bridge loan simultaneously can be financially challenging.
- Stricter qualification criteria: Qualifying for a bridge loan might be more demanding than a traditional mortgage.
- Potential for slower underwriting: The underwriting process for a bridge loan can take longer than anticipated.
Lenders will also assess the equity in your current home when determining your borrowing capacity. Securing a bridge loan might be difficult if your mortgage debt exceeds 80% of your home’s value.
When is a bridge loan a good solution?
Depending on your circumstances, a bridge loan could be exactly what you need:
- You need the equity from your current home for a down payment for a new home.
- You can’t afford a double move and interim housing or need to bridge the sale and purchase timelines.
- Your dream home just hit the market, and you want to act fast to avoid competitive delays.
- Home sale contingencies have hindered your offers; a bridge loan provides immediate purchasing power. Learn more about home sale contingency.
- Selling an empty or staged home is easier and potentially more profitable, which is feasible if you move into your new home quickly.
When you cannot prepare or stage your current home for sale while still living in it, a bridge loan can provide the necessary funds and flexibility. This will allow you to vacate your current home, stage it effectively for sale, and potentially achieve a higher selling price.
What’s required to get a bridge loan in Washington, D.C.?
To secure a bridge loan in Washington, D.C., you typically need to meet certain criteria:
- Qualifying income: Lenders will assess your income to ensure you can cover payments on your current mortgage, new mortgage, and any bridge loan payments.
- Sufficient equity: You need at least 20% equity in your existing home, though some lenders may require up to 50%.
- Good credit history: A credit score above 650 is generally needed, influencing your interest rate and loan-to-value ratio. Higher scores are advantageous.
- Current home listed for sale: Some lenders require evidence that your existing home is on the market, ensuring its sale within the bridge loan’s term.
How much does a bridge loan cost in Washington, D.C.?
The cost of a bridge loan in Washington, D.C., generally exceeds that of a standard mortgage, reflecting both the convenience and risk involved. Expect interest rates 1-3 percentage points higher than those for a conventional mortgage. Additionally, bridge loans may include various transaction fees.
This higher cost is attributed to the increased risk lenders take, as there’s a chance your current home may not sell within the expected timeframe. If this occurs, you’ll need to be financially prepared to handle your mortgage and bridge loan payments simultaneously.
The specific rate you’re offered will depend on factors like your credit score and the lender you choose.
How to reduce bridge loan costs
One way to reduce costs is by applying for a bridge loan with the same lender as your new mortgage. This can eliminate the need for additional underwriting or mortgage fees, as your bridge loan and new mortgage will be processed together.
It’s crucial to compare options and understand that bridge loans are meant for short-term use. Evaluate what works best for you, considering the total costs, convenience, and your situation.
Budget for closing costs
Beyond the loan itself, be prepared to cover closing costs and legal/administrative fees, typically ranging from 1.5% to 3% of the loan amount. These may include:
- Appraisal fee
- Administration fee
- Escrow fee
- Title policy costs
- Notary fee
- Loan origination fee
By understanding these costs, you can better prepare for the financial implications of taking a bridge loan in Washington, D.C.
Bridge loan cost example
Below is an example of how much a $300,000 bridge loan might cost, along with possible fees.
You find a home you’d like to purchase, but you’re still waiting for your current Washington, D.C., house to sell. The asking price for the new home is $700,000. You can only come up with $400,000, but you have at least another $300,000 worth of equity in your current property. You want to access that money to cover the shortfall before selling your new home to another buyer.
| Net loan amount | $300,000 | $300,000 |
| Interest (varies) | 10% (example for 6 months) | $15,000 |
| Origination fee | 1.5% | $4,500 |
| Underwriting fee | $1,000 | $1,000 |
| Appraisal fee | $700 | $625 |
| Closing cost* | 3.9% | $11,700 |
| Total repayable amount | $332,825 |
*These closing costs typically range between 1.5%-3%
How Much Is Your Washington, D.C. Home Worth Now?
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Who provides bridge loans in Washington, D.C.?
It’s good to remember that acquiring a bridge loan may be difficult due to stringent underwriting requirements. Potential borrowers should look into several lending options before applying. The most common providers of bridge loans in the area include:
- Your mortgage lender: Check with your current lender; they might offer bridge loans, especially if you have a good payment history.
- Local banks: Many community and regional banks offer personalized services and bridge loans.
- Credit unions: These member-owned institutions often offer competitive rates and terms for bridge loans.
- Hard-money lenders: These are private investors or companies specializing in short-term lending with typically higher interest rates.
- Non-qualified mortgage (non-QM) lenders: These lenders offer loans that don’t meet traditional underwriting standards, including bridge loans.
Are there alternatives to bridge loans in Washington, D.C.?
While a bridge loan might not work for every Washington, D.C. homeowner’s unique situation, there are alternatives to consider:
- Home equity loan: This kind of loan (sometimes called a HEL) allows you to borrow money using the equity in your home as collateral. 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 (paying off the first mortgage and borrowing cash), you can just borrow the money you need at the higher interest rate and leave your first mortgage of at its lower rate.
- Home equity line of credit (HELOC): Another option to use your existing equity is a HELOC. This lets you pull money out of your property for a relatively low interest rate. Instead of receiving the money immediately, 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. Unlike a home equity loan, HELOCs typically have adjustable interest rates.
- Cash-out refinance: This type of loan lets you pull cash out of your home while refinancing your 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. For example, you cannot do two owner-occupied loans within one year of one another. 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 only need 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 has 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 must include this monthly payment when calculating your debt-to-income ratio. If your 401k plan allows, you can borrow up to $50,000 for your new purchase.
Are there modern ways to buy a house before I sell?
With today’s technology, there are real estate solution companies like HomeLight that incorporate bridge loans into convenient programs that streamline the process of buying and selling a house at the same time in Washington, D.C. These “Buy Before You Sell” programs can provide a more complete “bridge” to help you complete your move to a new home, thereby reducing stress and worry.
With your Washington, D.C. agent, HomeLight can help you move into your new home with speed and certainty while helping you get the strongest possible offer for your old home. Check with your agent if HomeLight Buy Before You Sell is available.
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 Washington, D.C.:
- 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 cost or commitment is required.
- Buy your dream home with confidence: Once approved, you’ll have access to a portion of your equity in your current home. You can submit a competitive offer with no home sale contingency at any time — regardless of how long it takes to find your dream home. Our near-instant Equity Unlock Calculator lets you estimate how much equity we can unlock from your home.
- Sell your current home with peace of mind: After you move into your new home, we 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.
Benefits of Homelight Buy Before You Sell
- Flexibility in timelines: No need to sync up sale and purchase dates perfectly. This program gives you breathing space to plan your move without feeling hurried.
- Financial peace of mind: Say goodbye to the stress of potential double mortgages or dipping into savings to bridge the gap between homes.
- Enhanced buying power: In a seller’s market, a non-contingent offer can stand out, increasing your chances of landing your dream home.
- Sell for up to 10% more: After you move, you can list your old home unoccupied and potentially staged, leading to a higher selling price, according to HomeLight transaction data.
For Washington, D.C., homeowners caught in the buy-sell conundrum, HomeLight’s Buy Before You Sell program offers a convenient and stress-reducing solution. Learn more program details at this link.
HomeLight also offers other services for homebuyers and sellers in Washington, D.C., such as Agent Match to find the top-performing real estate agents in your market, and Simple Sale, a convenient way to receive a no-obligation, all-cash offer to sell your home in as little as 10 days.
You might also try HomeLight’s Net Proceeds Calculator as you plan your home sale.
A creative financing solution for Washington, D.C. homeowners
As homeowners in Washington, D.C., face a competitive housing market with elevated prices, bridge loans are becoming increasingly popular. These loans leverage the equity in your previous home, providing the financial flexibility needed to transition to a new property. This approach allows you more time to sell your current home, alleviating the stress of perfect timing.
While bridge loans offer convenience during this transition, they can also come with higher costs and may not suit everyone’s financial situation.
For a streamlined approach, consider HomeLight’s Buy Before You Sell program. This innovative option alleviates the uncertainty of your home-buying journey. Additionally, HomeLight can connect you with experienced local real estate agents well-versed in bridge loan transactions, ensuring you make informed decisions throughout your home-buying process.
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