Managing the sale of your Austin home while trying to purchase a new one can be difficult. With rising prices in a market where homes are in high demand, timing your sale and purchase can be particularly challenging.
Homeowners often feel their only option is to sell their current home, move into temporary accommodation, and search for their new house.
But what if there was a better way to transition from your old home to your new one?
Enter the bridge loan.
This short-term financing solution can provide the funds you need to secure your new Austin home before selling your old 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 Austin, HomeLight encourages you to reach out to your own advisor.
What is a bridge loan, in simple words?
A bridge loan is a temporary solution designed to “bridge the gap” between selling your current home and buying a new one. Imagine you’ve found your dream home, but your funds are tied up in your existing home’s equity.
A bridge loan lets you leverage the equity in your current home to provide the necessary cash for a down payment and to handle closing costs for your new house.
Although they tend to be pricier than traditional mortgages, bridge loans offer flexibility when trying to secure your new home purchase without waiting to sell your old one.
How does a bridge loan work in Austin?
A bridge loan often comes into play when you’re eager to snap up a new property before your old home has sold. It’s a common scenario: you’ve found the perfect new home but need to access the equity from your current home to cover the down payment and closing costs for this new venture.
Typically, the lender handling your mortgage for the new Austin property will also manage your bridge loan. They’ll require that your existing home is actively listed for sale. These bridge loans are generally available for a period ranging from six months to a year.
The lender will calculate your debt-to-income ratio (DTI). This calculation will include the ongoing mortgage payments on your current Austin home, the payments for the new property, and any interest-only payments on the bridge loan, if applicable.
If your old home is already under contract with a buyer who has secured their loan approval, your lender might only consider the mortgage payments for your new home. This is done to ensure that you can comfortably manage payments on both properties, providing a safety net in the unlikely event that your current home doesn’t sell quickly.
What are the benefits of a bridge loan in Austin?
Bridge loans offer several advantages for Austin homebuyers, making them an appealing option in the competitive real estate market:
- You can make a non-contingent offer on your new home.
- Only one move is required, saving time and stress.
- Prepare your old home for sale more effectively, including staging.
- Some lenders offer no payments during the loan period.
- Act quickly on ideal properties without waiting for your current home’s sale.
These benefits make bridge loans a strategic choice for Austin buyers needing financial flexibility before their previous home sells, allowing them to utilize sale proceeds to settle the bridge loan.
What are the drawbacks of a bridge loan?
While bridge loans offer unique advantages, it’s important to consider their potential drawbacks:
- Additional loan costs like underwriting and origination fees.
- Financial strain from managing two mortgages and a bridge loan, even if it’s interest-only.
- More challenging qualification criteria compared to traditional mortgage loans.
- Potentially slower underwriting process than anticipated.
Lenders will evaluate your equity in your current home alongside your monthly income to assess your borrowing eligibility. If your current home’s value exceeds 80% of what you owe, qualifying might be difficult.
When is a bridge loan a good solution?
A bridge loan can be a practical solution in certain real estate scenarios:
- Equity from your current home is needed for a new home’s down payment.
- Affording a double move and interim housing is challenging, or bridging sale and purchase timelines is crucial.
- Your dream home is available, and immediate action is required to avoid competitive delays.
- Your offer’s home sale contingency has hindered deals, and you seek immediate purchasing power.
- Selling a staged home can be more profitable, and a bridge loan allows you to prepare or stage your current home for sale while still living in it, enhancing its market appeal and potential selling price.