Bridge loans in California allow a property owner to borrow against their California real estate in order to help purchase their next property. California bridge loans are short-term and typically written for up to 11 months. This is generally a sufficient amount of time to purchase a new property and then sell the previous property.
A California bridge loan is recorded against the real estate with a note and deed of trust just like a traditional loan. Once the home with the bridge loan against it is sold, the bridge loan is automatically paid off through the purchase escrow. There are numerous benefits to obtaining financing from direct California bridge lenders.
California has one of the most competitive and expensive real estate markets in the United States. With home prices continually rising, many homebuyers struggle to purchase a home before selling their existing property. This is where bridge loans come into play. A bridge loan allows a borrower to tap into their home equity to purchase a new home before selling their old one. This article will provide an in-depth look at bridge loan rates in California, who offers them, loan terms, requirements, and more.
What is a Bridge Loan?
A bridge loan, also known as a swing loan or interim financing, is a short-term loan that bridges the gap between the purchase of a new home and the sale of an existing home. It allows borrowers to tap into their home equity to come up with a down payment on their new home. Once their old home sells, the proceeds are used to pay off the bridge loan.
Bridge loans are ideal for homeowners who want to purchase their next home before selling their current one This prevents having to move twice or deal with contingent offers It also allows buyers to make competitive all-cash offers in California’s hot housing market,
Average Bridge Loan Rates in California
Bridge loan rates are generally higher than rates for traditional mortgages This is because they are considered short-term, high-risk loans Here are the average bridge loan rates in California
- Interest rates: 8% – 12%
- Origination fee: 2% – 5% of loan amount
- Other fees: Appraisal, documentation, underwriting, etc.
Bridge loans typically have variable interest rates, meaning the rate fluctuates but will not exceed a certain cap or ceiling. Rates are based on the index the lender uses, such as the Prime Rate, LIBOR, etc.
Factors that affect bridge loan rates include:
- Loan to value (LTV) ratio – The lower the LTV, the better the rate
- Credit score – Borrowers with higher scores get better rates
- Loan amount – Larger loans may get slightly better rates
- Property type – Single family, multi-family, commercial, etc.
Always shop around with multiple lenders, as rates and fees can vary significantly.
Bridge Loan Lenders in California
There are several types of lenders that offer bridge loans in California:
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Banks – Large national banks like Wells Fargo, along with local and regional banks. They offer competitive rates but can have a lengthy approval process.
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Mortgage lenders – Some non-bank mortgage lenders offer bridge loan programs. Their rates are higher but may fund faster than banks.
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Hard money lenders – Specialize in bridge loans and other non-traditional loans. They offer the fastest funding but have the highest rates.
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Private lenders – Individual investors who lend their own capital. Rates and terms are negotiated on a case-by-case basis.
When choosing a lender, look for an experienced company with a reputation for excellent customer service and fast funding times. Make sure they are licensed to conduct lending activity in California.
Bridge Loan Terms in California
Typical bridge loan terms in California are:
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Loan amount – Up to 80% of the home’s value but usually around 50-70% LTV. The more equity, the better the terms.
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Term length – Most bridge loans have terms of 6 months to 3 years. 1-2 years is common.
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Interest rate – As noted above, 8% – 12% is typical for California. Rates are variable, not fixed.
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Origination fee – Usually 2-5% of the loan amount. Covers processing and underwriting costs.
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Repayment – Interest-only payments are required during the loan term. The loan principal is repaid once the old home sells.
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Prepayment penalties – Some lenders charge a penalty fee for paying off the loan before maturity. Make sure to ask.
Always verify the lender’s exact rates, fees, and loan terms before committing to a bridge loan.
Bridge Loan Requirements in California
Here are some common eligibility and documentation requirements for bridge loans in California:
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Credit score – Minimum 620 but many lenders require 650+
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Down payment – At least 25-30% down is expected on the new home
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Debt-to-income ratio – Varies by lender but 40-50% is common
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Loan to value ratio – Up to 80% but lower is better for rates/terms
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Home appraisal – Full appraisals usually required on both homes
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Employment/Income – Tax returns, pay stubs, and bank statements to verify income
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Existing home – Must be listed for sale if not already under contract
Having significant equity in your current home is key to qualifying and getting the best bridge loan rate. The more equity, the lower the LTV ratio will be.
Should You Get a Bridge Loan?
A bridge loan can be a great option for California homeowners who want to purchase their next home before selling their current one. However, bridge loans carry more costs and risks compared to traditional mortgages. Here are some pros and cons to weigh:
Pros
- Tap home equity without selling first
- Make competitive all-cash offers
- Avoid contingent offers or moving twice
- Faster closing versus traditional financing
- Still keep your home on the market during the loan
Cons
- Higher interest rates and fees
- Real estate taxes and insurance on two properties
- Monthly payments on both homes
- Prepayment penalties may apply
- Less tax deductible interest versus traditional mortgage
Work with an experienced loan officer to see if a bridge loan makes sense for your particular home buying situation. Be sure to shop multiple lenders to compare bridge loan rates and terms. This will help ensure you find the most competitive financing option.
Alternatives to Bridge Loans
If you don’t want to take on the higher cost of a bridge loan, here are a few alternatives to consider:
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Home equity line of credit (HELOC) – Tap equity with lower rates and fees than a bridge loan.
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Home equity loan – Similar to a HELOC but you receive the money upfront in a lump sum.
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Contingent sales offer – Make your new home purchase contingent on selling your current home.
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Delay new purchase – Consider waiting to buy your next home until your current one sells.
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Cash-out mortgage refinance – Pull equity out of your current home through a refinance.
Each option has its own pros and cons to weigh carefully. In certain situations, a bridge loan can be the optimal choice despite the higher cost.
The Bottom Line
Bridge loans allow California homeowners to leverage their equity to purchase a new home before selling their old one. This helps buy and sell homes seamlessly. Just be aware that bridge loan rates are higher than traditional mortgages – usually 8-12% plus origination fees. Lenders look for strong credit, income, and home equity to qualify borrowers. Shop multiple lenders to compare bridge loan rates and terms. With the right planning, a bridge loan can be an effective way to buy a new home in California’s competitive housing market.
California Residential Bridge Loans Benefits
California residential bridge loans help borrowers access equity in their current property to help purchase a new property. Direct bridge loan lenders provide these types of loans while traditional lenders typically do not. There are various benefits of a residential bridge loan for a borrower.
Borrowers commonly need to access equity in their existing residence in order to purchase their next property. When a borrow has a significant amount of equity in their property, the most straightforward way to access that equity may be to simply the sell the property. Selling the existing property prior to having a new house to move into would require finding a temporary rental until a new property is purchased and then moving a second time.
With a residential bridge loan, the borrower can pull equity from their existing property and use the funds to purchase a new property and then move to the new home immediately. Once they have moved into the new home, they can sell their previous home. The sale of the property will pay off the existing residential bridge loan.
Debt to Income Ratio
The current federal regulations require a borrower to be below a certain debt to income ratio in order to qualify for a consumer purpose loan. In many situations, a borrower is able to easily qualify for one home loan but having two home loans at the same time (an additional loan to purchase the new property) would be too much debt for them to qualify.
Residential bridge loans are a special exception and a borrower is able to exceed the normal debt to income ratio (ability to repay requirement). Bridge loan borrowers can go beyond the normal debt to income ratio since residential bridge loans are only a short-term or temporary loan and the sale of the property qualifies the borrower for the ability to repay requirement. Bridge loans are written for less than 12 months.
Not having to qualify based on a debt to income ratio makes residential bridge loans especially helpful for seniors and retired people who have sufficient equity in their homes but have relatively lower current levels of income.
The borrower can take out a residential bridge loan against their current property to raise funds for the down payment for the purchase of their new property. The borrower can then also obtain an additional residential bridge loan for the purchase of the new property. Once moved in to the new property, the previous property can be sold which pays off the residential bridge loan recorded against that property. At that point the borrower can then refinance the bridge loan on their new property with a long-term loan as their debt to income ratio would be back to a reasonable level.
Traditional lenders are usually not known for being able to fund loans quickly. The approval process alone can take many weeks in some situations. It is not uncommon for refinance loans from a traditional lender to take 1-2 months or more depending on the lender and the current market conditions. Traditional lenders are generally better about providing timely funding for purchase loans as they understand the borrower usually needs the funding to come through in order to close with a 30 day escrow.
A private money bridge loan lender can fund a residential bridge loan in 2 weeks for a purchase and 2.5 weeks for a residential bridge loan to pull funds from an owner-occupied property. If two bridge loans are needed (one to pull funds from an existing property and another to purchase the new property), the bridge loans can be processed simultaneously to easily complete a purchase with a 21 day escrow.
The Truth About Bridge Loan Financing: Pros and Cons Revealed | Tri Valley Realtor® | Michelle Lewis
FAQ
What is the typical interest rate on a bridging loan?
What is the average interest rate for a bridge loan?
What are the cons of a bridge loan?
What is the interest rate for bridge finance?
How much does a bridge loan cost in California?
Daunt shares that with the bridge loans she offers at Treehouse Mortgage Group, this fee comes out to 2% of the bridge loan amount. Other California lenders might charge more or less for this kind of loan, but 2% is typical. So, for a bridge loan of $200,000 to put toward your down payment on your new purchase, this would be a cost of $4,000.
How common are bridge loans in California?
Bridge loans are also more common in California than you might think. Lopez estimates that in the offers he has seen in San Diego in the last three years, 15% to 20% of those came from buyers taking advantage of bridge loans. Some examples of when a bridge loan might be a solution include:
How long does a bridge loan last?
Bridge loans typically last for six-month or 12-month terms. They are secured by the borrower’s old home and lenders rarely extend one unless the borrower agrees to finance the new home’s mortgage with the same institution. Rates can range anywhere from the prime rate to the prime rate plus 2 percentage points.
What is a bridge loan?
A bridge loan, sometimes called a swing loan, makes it possible to finance a new house before selling your current home. Bridge loans may give you an edge in today’s tight housing market — if you can afford them. 20% equity in your current home required. Six- to 12-month terms. High interest rates and fees. Best in areas where homes sell quickly.