Bridge Loan or HELOC? How to Buy Your Next Home Before Yours Sells in New Jersey

A bridge loan and a home equity line of credit (HELOC) are two ways to borrow against the home you're selling so you can buy the next one before yours sells. A bridge loan is short-term financing meant to be paid off when your sale closes, and a HELOC is a line of credit against your equity, usually at a variable rate, that you open while you still own the home. Either way, your lender has to be satisfied that you can carry both homes for a while, so that conversation comes first.

I'm Dennis Mark Interdonato with The Dennis Mark Group. A new job with a start date, two households becoming one, or a house you've outgrown can put you in front of the next home before yours is ready to list. Most of my clients in Monmouth and Ocean County are selling one home and buying the next at the same time, and the question is always how to cover the gap. Here's how the two most common tools work, from official sources, and the routes worth comparing first.

Why would you buy before you sell?

Usually because the timing isn't yours to pick. A job starts on a set date, or the house that fits the next chapter comes up before yours is on the market. My stand: when you find it, buy it. People who find the right home early often hesitate, afraid of missing something better. You already know what you want.

The catch is the down payment, which for most sellers is sitting in the equity of the home they haven't sold yet. A bridge loan or a HELOC uses that equity early.

What is a bridge loan?

It's short-term financing, typically secured by the home you're selling, used to close on the new home first. Federal mortgage rules describe "a temporary or 'bridge' loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months" (Regulation Z, 12 CFR 1026.43).

If your new mortgage is one sold to Fannie Mae, its Selling Guide accepts a bridge loan as a source of funds when the lender documents that you can carry the payments on the new home, the current home, the bridge loan and your other debts, and the bridge loan can't be cross-collateralized against the new property (Fannie Mae B3-4.3-14). The bridge payment counts in your debt-to-income ratio unless your lender has a fully executed sales contract on your current home and confirmation that any financing contingencies have been cleared (Fannie Mae B3-6-05).

What is a HELOC, and how is it different?

The Consumer Financial Protection Bureau describes a HELOC as an "open-end" line of credit "that allows you to borrow repeatedly against your home equity." You draw what you need up to your limit during the draw period, then enter a repayment period, when "monthly payments are often significantly higher." HELOCs usually have a variable rate, so the payment can change from month to month (CFPB).

In a buy-before-you-sell plan, a HELOC on your current home can cover the down payment on the next one, and the balance is paid off from your sale at closing, along with your mortgage. Fannie Mae's Selling Guide treats borrowed funds secured by an asset, real estate included, as an acceptable source for a down payment, closing costs and reserves, and the lender counts the payment as a debt (Fannie Mae B3-4.3-15).

Two cautions from the CFPB: if your home's value drops significantly, or your lender no longer believes you can make the payments, the lender might freeze further draws. And "if you fall behind or can't repay the loan on schedule, you could lose your home." Before you list, ask your lender whether they'll open a line on a home that's about to go on the market, and how long approval takes.

Bridge loan or HELOC: how do they compare?

• How the money comes. A bridge loan is a set amount for the gap. A HELOC lets you draw up to your limit, and, like a credit card, paying it down frees up credit again (CFPB).
• How long it lasts. Bridge loans are short term. A HELOC's draw period could last 10 years, the CFPB says, though in this plan you'd pay it off when your sale closes.
• The cost. HELOCs usually carry a variable rate. For a bridge loan, get the rate, fees and term in writing, and ask what happens if your home hasn't sold by the end.
• What you qualify for. Either payment can reduce what you qualify for on the new mortgage, so ask your lender to run your numbers both ways.

Do you need to borrow at all?

Not always. Compare the routes that don't need a second loan:

• Qualify with both payments. Fannie Mae's guide uses both your current and your new housing payment to qualify you, unless the lender has your executed sales contract and confirmation that its financing contingencies have been cleared (Fannie Mae B3-6-06). If your income and savings support both homes for a while, that may be enough.
• Make the purchase depend on your sale. A home sale contingency protects you if your sale doesn't close, though it usually makes an offer weaker against competing offers.
• Line up both closings. With back-to-back closings, your sale funds your purchase the same day.
• Sell first and stay a little longer. A short rent-back, on terms your attorney writes, can give you time to close on the next home.

Is the interest on a HELOC tax-deductible?

Maybe not for this use. IRS Publication 936 says interest on home equity loans and lines of credit is deductible "only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan" (IRS). A line on your current home used to buy a different home may not meet that test, so ask your tax professional.

How does selling your current home fit in?

Every version of this plan ends the same way: your current home sells and pays off what you borrowed. The first two weeks on the market set the price, so we prepare and price for them. In one Howell sale, that meant an accepted offer in the first 7 days with 6 offers over asking. Every home is different, and a past result doesn't promise the next one.

Start with what your home is worth, because the bridge loan amount, the HELOC limit and your down payment all come back to that number. Moving up? Here's how I approach selling your first home to buy a bigger one. How I plan a move around a change like this is on my life events page, and the Life Events Guide lays out the order of operations.

Frequently Asked Questions

Can I use a HELOC for the down payment on my next house?

It can work. Fannie Mae's Selling Guide accepts borrowed funds secured by real estate for a down payment, and the lender counts the payment as a debt. Your lender decides whether it fits your loan.

How long does a bridge loan last?

It's short term. Federal mortgage rules describe bridge loans with a term of 12 months or less, and Fannie Mae's guide sets no specific limit. Get each lender's term in writing.

Is a bridge loan better than a HELOC?

Neither is better for everyone. It depends on the cost, how fast you can get it, and what you qualify for with it. Compare both with your lender, along with the routes that don't need a second loan.

What happens to the loan when my house sells?

A bridge loan or HELOC on the home you're selling is normally paid off from the sale at closing, along with your mortgage. Your attorney and the title company handle the payoff figures.

This is general information, not legal, tax or lending advice. Your lender decides what you qualify for, your tax professional answers the tax questions, and your attorney handles the contracts.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. Read more about Dennis Mark.

Keep reading

• How Dennis Mark plans a move around a life event
• Plan it step by step with the free Life Events Guide.
• Every number in this plan starts with a free home value.
• Have a question this didn't answer? Send it to Dennis Mark and it may become the next article.