Navigating the real estate market in Minnesota can feel like a high-wire act, especially when you’re juggling the sale of your current home with the purchase of a new one. This balancing act becomes even more challenging when faced with Minnesota’s fluctuating inventory and soaring prices. You might find yourself in a dilemma, thinking your only option is to sell your existing home, move to a temporary location, and then embark on the hunt for your dream house.
But what if there’s a smoother path to transition from your old home to your new one? Enter the bridge loan, a financial lifeline that can synchronize the purchase of your new Minnesota home while leveraging the equity of your current property.
A bridge loan in Minnesota isn’t just another financing option. It’s a strategic tool tailored for homeowners like you, seeking a seamless move in today’s complex market. Let’s explore how a bridge loan can be the missing puzzle piece in your homebuying and selling journey.
Yes, You Can Buy Before You Sell. Why Move Twice?
Through our Buy Before You Sell program, HomeLight can help you unlock a portion of your equity upfront to put toward your next home. You can then make a strong offer on your next home with no home sale contingency.
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 Minnesota, HomeLight encourages you to reach out to your own advisor.
What is a residential bridge loan?
A bridge loan is essentially a short-term financial boost, designed to help you, the homeowner, navigate the period between buying a new home and selling your existing one. Imagine it as a financial “bridge” that carries you smoothly over the gap between these two significant transactions.
This type of loan taps into the equity of your current home, providing the necessary funds for a down payment and other expenses linked to your new home purchase. It’s like having a financial safety net, ensuring you don’t miss out on securing your new dream home in Minnesota while you’re still in the process of selling your old one.
Bridge loans usually have higher interest rates compared to traditional mortgages, given their short-term nature and the risk they carry for lenders.
How does a bridge loan work in Minnesota?
Imagine you’re a homeowner in Minnesota, eager to move into your new dream home, but your current house hasn’t sold yet. This is where a bridge loan steps in, offering a practical solution to this timing dilemma. It allows you to tap into the equity of your existing home, providing the funds needed for the down payment and closing costs of your new property.
In many scenarios, the same lender managing your new mortgage will also handle your bridge loan. They’ll typically want to see that your current home is actively listed for sale and will offer the bridge loan for a period ranging from six months to a year.
A key factor in this process is your debt-to-income ratio (DTI). This ratio includes the payments you’re making on your existing mortgage, the payments for your new home, and any interest-only payments on the bridge loan. The DTI helps lenders assess your ability to handle payments on both properties simultaneously, a critical consideration if your current home doesn’t sell immediately.
However, there can be a bit of relief if your current home is already under contract and the buyer has secured their loan approval. In this case, some lenders may only consider the mortgage payment of your new home in the DTI calculation.
What are the benefits of a bridge loan in Minnesota?
In Minnesota, a bridge loan can provide several key advantages, making your homebuying journey smoother and more flexible. Here are some of the benefits:
- Makes non-contingent offers possible: You can bid on your new home without the sale of your current one being a condition.
- Allows you to move only once: You avoid the hassle and expense of multiple moves, transitioning directly to your new home.
- Helps you prepare your old home for sale: After moving out, you have the opportunity to stage and improve your old home for a better sale.
- Maximizes the potential for no payments during loan term: Some lenders offer the option of not requiring payments during the bridge loan period.
- Seizes the opportunity to secure desirable properties: You can promptly pursue your dream home in Minnesota without waiting for your current home to sell.
These benefits combine to make bridge loans an attractive financing solution for Minnesota homeowners, especially when tight on funds before selling their existing property. This flexibility allows you to comfortably manage your finances, using the sale proceeds of your old home to settle the bridge loan.
What are the drawbacks of a bridge loan?
While a bridge loan offers flexibility and convenience in your homebuying process, it’s important to be aware of its potential drawbacks:
- Additional loan costs: Expect fees like underwriting and origination fees, adding to your overall financial burden.
- Increased financial pressure: Managing payments for two mortgages plus a bridge loan can be a significant financial strain.
- Stricter qualifying criteria: Qualifying for a bridge loan can be more challenging than for a traditional mortgage.
- Potentially slow underwriting process: The underwriting for bridge loans may take longer than anticipated, affecting your timelines.
Moreover, lenders will scrutinize the equity in your current home to determine your borrowing limit. If your existing mortgage debt exceeds 80% of your home’s value, you might not be eligible for a bridge loan. This aspect is important to consider as it directly impacts your ability to secure the necessary funds.
When is a bridge loan a good solution?
A bridge loan can be a strategic solution in certain real estate situations, offering flexibility and easing the stress of transitioning between homes. Here are some scenarios where a bridge loan might be particularly useful:
- You need the equity from your current home for the down payment on a new one.
- Double moves and interim housing are costly or impractical, and you need to align the sale and purchase timelines.
- Your ideal home appears on the market, and you need to act fast to avoid competitive delays.
- Contingency clauses in your offers have been problematic, and you need more immediate purchasing power.
- You’re unable to prepare or stage your current home for sale while still living in it. An empty or well-staged home often sells faster and for a higher price, and a bridge loan can provide the necessary funds to move out and stage your home effectively, enhancing its market appeal.
What’s required to get a bridge loan in Minnesota?
To qualify for a bridge loan in Minnesota, you typically need to meet the following criteria:
- Qualifying income: Lenders will assess your income to ensure you can manage payments on your current mortgage, new mortgage, and bridge loan.
- Sufficient equity: You must have at least 20% equity in your current home, though some lenders may require up to 50%.
- Good credit history: A credit score above 650 is usually required, and it influences your interest rate and other loan terms.
- Current home listed for sale: Many lenders require that your existing home be on the market, ensuring it’s likely to sell during the bridge loan term.
How much does a bridge loan cost in Minnesota?
In Minnesota, the cost of a bridge loan typically exceeds that of a standard mortgage. You can expect interest rates to be about 1 to 3 percentage points higher than those of a conventional mortgage. This premium reflects the increased risk lenders take on with bridge loans. Also, be prepared for additional transaction fees associated with the bridge loan.
The heightened cost is linked to the possibility that your home might not sell within the expected timeframe, leading to a scenario where you’d need to cover both mortgage and bridge loan payments. As you make plans, ensure your financial stability can accommodate these potential overlapping costs.
Your specific bridge loan rate will depend on factors like your credit score and the lender you choose.
How to reduce bridge loan costs
If your bridge loan and new mortgage are through the same lender, you might avoid extra underwriting and related fees, as both loans will likely be processed together. Always compare options to find the most cost-effective and convenient solution for your situation. Remember, bridge loans are designed as a short-term or interim solution.
Budget for closing costs
Apart from the loan itself, there are closing costs and legal and administrative fees to consider. These typically range from 1.5% to 3% of the loan amount and can include:
- Appraisal fee
- Administration fee
- Escrow fee
- Title policy costs
- Notary fee
- Loan origination fee
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 Minnesota house to sell. The new home’s asking price is $400,000. You can only come up with $100,000, 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 your new home is sold to another buyer.
| Net loan amount | $300,000 | $300,000 |
| Interest (varies) | 10% (example for 6 months) | $15,000 |
| Origination fee | 1.5% | $4,500 |
| Underwriting fee | $1,000 | $1,000 |
| Appraisal fee | $500 | $500 |
| Closing cost* | 2% | $6,000 |
| Total repayable amount | $327,000 |
*These closing costs typically range between 1.5%-3%
What's Your Current Home Worth?
As you make plans to buy a new home, get a value estimate on your current house from HomeLight for free. Our tool analyzes records of recently sold homes near you, your home’s last sale price, and other market trends to provide a preliminary range of value in under two minutes.
Who provides bridge loans in Minnesota?
In Minnesota, not every financial institution offers bridge loans due to the specific underwriting requirements associated with them. If you’re considering a bridge loan, it’s advisable to explore various lending sources to find the best fit for your needs. Common providers of bridge loans in Minnesota include:
- Your mortgage lender: Many people start with the lender of their current mortgage, as there’s already an established financial relationship.
- Local banks: These institutions often provide tailored financial services, including bridge loans, suited to local market conditions.
- Credit unions: As member-focused organizations, credit unions can offer competitive terms on bridge loans.
- Hard-money lenders: These are private lenders offering loans with different terms than traditional banks, sometimes at higher interest rates.
- Non-qualified mortgage (non-QM) lenders: These lenders specialize in loans that don’t meet the typical standards for a mortgage, such as bridge loans.
Additionally, modern real estate companies are increasingly offering services to facilitate bridge loans, simplifying the process of bridging the gap between selling your current home and purchasing a new one. We’ll illustrate how this works in a later section of this post.
Are there alternatives to bridge loans in Minnesota?
While a bridge loan might not work for every Minnesota 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 Minnesota. 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 Minnesota 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 Minnesota:
- 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.
- 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.
- 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.
Benefits of Homelight Buy Before You Sell
- Flexible timelines: There is no need to sync up sale and purchase dates perfectly. This program gives you breathing space to plan your move without feeling hurried.
- Financial peace of mind: Say goodbye to the stress of potential double mortgages or dipping into savings to bridge the gap between homes.
- Enhanced buying power: In a seller’s market, a non-contingent offer can stand out, increasing your chances of landing your dream home.
- More earnings: After you move, you can list your old home unoccupied and ready for viewing. A professionally staged home can sell for up to 13% more than an unstaged one.
For Minnesota 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 Minnesota, such as Agent Match to 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 might also try HomeLight’s Net Proceeds Calculator as you plan your home sale.
A creative financing solution for Minnesota homeowners
As Minnesota homeowners face the challenges of a competitive housing market and rising home prices, bridge loans emerge as a viable solution to streamline the process of purchasing a new home while selling the old one.
Bridge loans empower you to leverage the equity in your previous home, providing a financial cushion that eases the timing pressure typically associated with buying and selling simultaneously. This type of financing offers a strategic advantage, allowing you to move forward with your new home purchase without the immediate need to sell your current property.
However, while bridge loans offer convenience and flexibility, they may not be the perfect fit for everyone due to potential costs and specific financial requirements.
For a more streamlined and more sure experience, consider exploring HomeLight’s Buy Before You Sell program. This innovative approach can alleviate much of the uncertainty surrounding your next home purchase. Additionally, HomeLight can connect you with a highly experienced Minnesota buyer’s agent, well-versed in navigating the intricacies of bridge loans and other financing solutions.
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