Navigating the real estate market in Pennsylvania, especially when you’re trying to coordinate the sale of your current home with the purchase of a new one, can be a challenging balancing act. The task becomes even more daunting when faced with low inventory and high prices. You might find yourself contemplating a scenario where you sell your home, move to a temporary location, and then embark on the hunt for your new dream house. This approach, however, can be stressful and less than ideal.
Enter the bridge loan, a potential lifeline in this complex process. This financial tool could be the missing piece that helps make your home-buying journey seamless and less burdensome. In this post, we’ll provide tips and insights about bridge loans in Pennsylvania, and how to Buy Before You Sell.
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 Pennsylvania, HomeLight encourages you to reach out to your own advisor.
What is a residential bridge loan?
A bridge loan is essentially a financial tool designed to help you, the homeowner, when you’re caught in the common dilemma of needing to buy a new home before selling your existing one. Imagine it as a short-term lending solution that taps into the equity of your current home. This provides you with the necessary funds to make a down payment and handle closing costs on your next home purchase in Pennsylvania.
Think of a bridge loan as a temporary financial pathway. It effectively “bridges” the gap between the time you buy your new home and the time you sell your old one.
Due to their temporary nature and the inherent risks involved, bridge loans usually come with slightly higher interest rates compared to conventional mortgages.
How does a bridge loan work in Pennsylvania?
In Pennsylvania, a typical scenario where you might consider a bridge loan is when you find your dream home but haven’t yet sold your current property. In this situation, the equity from your existing home is leveraged to cover the down payment and closing costs for your new home.
Often, the lender who is financing your new home will also provide the bridge loan. They’ll usually require that your current home is actively listed for sale. These bridge loans are generally available for a period ranging from six months to a year, giving you some breathing room.
Your lender will likely assess your debt-to-income ratio (DTI) to determine your eligibility for a bridge loan. This calculation will include your existing mortgage payments, the expected payments for your new home, and any interest-only payments on the bridge loan. This comprehensive evaluation ensures that you can manage the financial obligations of both properties concurrently.
However, there’s a possible silver lining if your current home is close to being sold. If it’s under contract and the buyer has secured their financing, your lender might consider only the mortgage payment of your new home when calculating your DTI.
What are the benefits of a bridge loan in Pennsylvania?
Bridge loans in Pennsylvania offer several advantages that can make your homebuying experience more flexible and less stressful. Here are some key benefits:
- Make a non-contingent offer: Position yourself as a competitive buyer by making offers not contingent on selling your existing home.
- Single move convenience: Avoid the hassle and cost of multiple moves; transition directly from your old home to your new one.
- Prepare your old home for sale later: More time and space to make your old home market-ready, potentially increasing its sale value.
- Possible delayed payments: Some lenders offer a grace period with no payments, easing your financial burden.
- Quick action on ideal properties: Grab the opportunity to buy your dream home without waiting for your current home to sell.
These benefits make bridge loans an appealing option for Pennsylvania buyers who need financial flexibility before they can sell their existing home, ultimately allowing them to settle the bridge loan using the sale proceeds.
What are the drawbacks of a bridge loan?
Bridge loans can be a helpful financial tool, but they also come with certain drawbacks that are important to consider:
- Additional loan costs: Expect fees like underwriting and origination, which add to the overall cost of the loan.
- Increased financial stress: Juggling payments for two mortgages plus a bridge loan (even if interest-only) can be financially challenging.
- More challenging qualification criteria: Securing a bridge loan can be more difficult than obtaining a traditional mortgage due to stricter requirements.
- Slower underwriting process: The approval process for a bridge loan may take longer than expected, potentially delaying your plans.
- Equity requirements: Lenders evaluate the equity in your current home; owing more than 80% of its value may disqualify you.
These considerations are crucial in assessing whether a bridge loan is the right choice for your financial situation and real estate goals.
What’s required to get a bridge loan in Pennsylvania?
To qualify for a bridge loan in Pennsylvania, you typically need to meet these criteria:
- Qualifying income: Lenders will assess your income to ensure you can handle payments on your current mortgage, your new mortgage, and potentially an interest-only payment on the bridge loan.
- Sufficient equity: You need at least 20% equity in your current home, but some lenders might require up to 50%.
- Good credit history: A favorable credit score, usually above 650, is important. This influences your interest rate and other loan qualifications like the loan-to-value ratio. The higher your score, the better the terms you might receive. Consider checking with your current mortgage lender, especially if you have a positive payment history, as they may offer bridge loans.
- Your current home listed for sale: While not always a requirement, some lenders may need proof that your current home is on the market to ensure its sale by the end of the bridge loan term.
How much does a bridge loan cost in Pennsylvania?
The cost of a bridge loan in Pennsylvania typically includes a higher interest rate compared to a standard mortgage. You can expect interest rates to be about 1-3 percentage points above what you might qualify for on a conventional mortgage loan. Additionally, bridge loans often incur various transaction fees.
This higher cost is linked to the increased risk for lenders, as there’s a possibility your home may not sell within the expected timeframe. If this occurs, you need to be financially prepared to manage both your mortgage and bridge loan payments simultaneously.
Your specific interest rate will largely depend on factors like your creditworthiness and the type of lender you choose to work with.
How to reduce bridge loan costs
Applying for a bridge loan with the same lender as your new mortgage can reduce costs. In such cases, you might not have to pay extra underwriting or other mortgage fees, as both loans will be processed together.
It’s also beneficial to shop around and compare options. Remember, bridge loans are a short-term solution. Evaluate what’s best for you in terms of total costs, convenience, and suitability for your situation. We’ll explore additional financing options in a later section.
Are there alternatives to bridge loans in Pennsylvania?
While a bridge loan might not work for every Pennsylvania 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 allows you to pull money out of your property for a relatively low interest rate. Instead of receiving the money all at once, 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. This would mean that 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 comes with 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 will need to include this monthly payment when calculating your debt-to-income ratio. If your 401k plan allows, you might be able to borrow up to $50,000 to put toward 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 Pennsylvania. These “Buy Before You Sell” programs can provide a more complete “bridge” to help you successfully complete your move to a new home, thereby reducing stress and worry.
Together with your Pennsylvania 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 to see if HomeLight Buy Before You Sell is available in your area.
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 Pennsylvania:
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 you’re approved, you’ll have access to a portion of your equity in your current home. You’ll be able to 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 current 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.
