Bridge Loans in Washington, D.C.: How to Unlock Home Equity to Buy Before You Sell

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: Credit scores influence your interest rate and loan-to-value ratio. Above 650 is generally required, but higher scores are advantageous.
• Currently listed home 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 to 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 and 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.

*These closing costs typically range between 1.5% and 3%. 

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: Your current lender 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 hard-money lending institutions in Washington D.C. specialize 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 an 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 helps you avoid early withdrawal fees, but 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.

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.:

1. 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.
2. 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.
3. 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.

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, which helps you 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 may 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 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 homebuying 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 homebuying process.

Header Source: (Katelyn Warner / Unsplash)