Bridge Loans in Colorado: How to Unlock Home Equity to Buy Before You Sell

How does a bridge loan work in Colorado?

A common real estate scenario where a Colorado buyer needs to apply for a bridge loan is when they need to purchase their new property before their old home has sold. In this case, they will use the equity from their previous home to cover the down payment and closing costs for their new purchase.

In many cases, the lender providing your new mortgage will also handle your bridge loan. They typically require that your existing home be listed on the market and will offer this bridge loan for a maximum of six months to one full year.

Depending on your unique situation, the lender on the new home might need to calculate your debt-to-income ratio (DTI). The DTI equation would include the payments from your current mortgage on your old house, your new payment on the home you are purchasing, and the interest-only payment on the bridge loan (if applicable).

However, your lender might only be able to include your new mortgage payment if your previous home is under contract and the new buyer has final loan approval for their purchase. Lenders do this to ensure you will be able to make the payments on both properties if your home does not sell immediately.

What are the benefits of a bridge loan in Colorado?

There are benefits to borrowing a bridge loan that can position you as a more flexible homebuyer.

“It provides like a safety net in the event that your current home doesn’t sell right away, and you’re selling your old home before purchasing a new one,” explains Johnna Hall, a top real estate agent in Aurora, Colorado, who has over two decades of real estate experience.

What are the drawbacks of a bridge loan?

While a bridge loan can increase your flexibility and alleviate some stress when selling your current home and purchasing a new one, there are some drawbacks, as there can be with any type of loan product. Take note of the following disadvantages so you can manage expectations:

Is it worth getting a bridging loan in Colorado?

A bridge loan isn’t a blanket solution for all real estate transactions, but it can ease the stress of transitioning between an old home and a new one for some sellers. Some examples of when a bridge loan might be a solution include:

• You need the equity you’ve built in your current home to make a down payment on a new one.
• You only want to move once. A bridge loan can cover the gap between closing on your old home and buying a new one, so you don’t end up between homes and need to rent or stay in a hotel in the interim.
• You’ve found a new home, but don’t want to risk losing it to another buyer. If the market is competitive, you’ll need to act quickly and decisively.
• You’ve made an offer, but the seller won’t accept a home sale contingency. The bridge loan can free you up to buy straight away.
• You’re unable to prepare or stage your current home for sale while still living in it. This could be because you need a blank slate to earn the best sale price, or maybe you need a significant renovation that would be easier to tackle once you’ve moved out.

What’s required to get a bridge loan in Colorado?

To qualify for a bridge loan in Colorado, you typically need the following:

• Qualifying income: Your lender will evaluate your income streams to determine if you can afford to make the payments on your current mortgage, your new mortgage, and possibly an interest-only payment on your bridge loan.
• Sufficient equity: You should have built at least 20% equity in your current house, although some lenders will require up to 50%.
• Good credit history: Depending on the lender or bridge loan program, you will need a favorable credit score, typically above 650. Your score will likely influence your interest rate and other qualifications, such as loan-to-value ratio, so the higher, the better. You may check with your current mortgage lender, especially if you have a positive payment history, to see if they offer bridge loans to current owners.
• Listed property: Your current home must be listed for sale. This is not always the case, but some lenders might require proof that it is on the market to ensure it will be sold by the end of the bridge loan term.

How much does a bridge loan cost in Colorado?

As in most markets nationally, a bridge loan in Colorado will typically carry a higher interest rate than a standard mortgage. Expect to pay anywhere from one to several percentage points higher than what you may qualify for on a mortgage loan, and understand that bridge loans are intended as a short-term or temporary solution.

“I would say, compare all of your options,” says Hall. “Determine what’s going to be best for you, not just in terms of costs but also convenience for your family.”

She adds that the higher cost of a bridge loan has much to do with the elevated risk for lenders. Bridge loans “come with higher interest rates and transaction costs,” she warns.

She advises borrowers to keep in mind that “your home [may] not sell in the timeframe that you would need to start paying the bridge loan. You need to make sure you’re in a place to be able to pay [both the mortgage and bridge loan].”

“Typically, homes are selling fairly quickly in Colorado,” Hall says, “But there are certain areas where it may take longer or not sell so quickly.”

For example, in Boulder County, the typical days on market (DOM), the time between listing a home and a signed contract, is currently around 61 days. However, in smaller communities such as Jackson County, the average is 123 days.

Because you never really know how long your home will take to sell, bridge loans can get pricey. Lenders build in extra costs to cover that risk. The closing costs and fees usually run from 1.5% to 3% of the loan amount, and may 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 $350,000 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 Pennsylvania house to sell. The new home’s asking price is $550,000. You can only come up with $200,000, but you have at least another $350,000 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.

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

Who provides bridge loans in Colorado?

Due to the underwriting demands for this type of loan, Hall notes that fewer institutions offer bridge loan products. Curious borrowers may inquire with a variety of lenders before applying. The most common sources include:

• Your mortgage lender
• Local banks
• Credit unions
• Hard-money lenders
• Non-qualified mortgage (non-QM) lenders

There are also modern real estate companies that can seamlessly handle finding you a bridge loan to help you fill the gap between buying and selling a home. We’ll share how this works later in this post.

Are there alternatives to bridge loans in Colorado?

If you think a bridge loan won’t work for your situation, there are alternatives to consider:

Home equity loan: A home equity loan lets a homeowner take their existing equity out of their home’s value in the form of a lump sum payment. Note that the interest rates for a home equity loan can be more expensive than your current rate on your first mortgage.

However, instead of completing a cash-out refinance for, say, $400,000 at 5% (paying off the first mortgage and borrowing cash), you can just borrow the $100,000 you need at a 6% to 7% interest rate and leave your first mortgage of $300,000 at its lower rate of 3%. If you think this loan fits your financial goals, consider these requirements when applying for a home equity loan.

Home equity line of credit (HELOC): Another option for homeowners to use their existing equity in their current home, HELOCs allow borrowers to pull money out of their 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. However, if you open this line of credit and close it very soon after, you might have to pay an early closure fee.

Cash-out refinance: This type of loan lets borrowers pull cash out of their home while refinancing their previous mortgages. Interest rates are typically higher for these kinds of loans than regular refinances but lower than 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 waiting 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 take out a first and second mortgage at the same time to fund your new purchase. This means that you would only need 10% down.

For buyers who can’t make a large 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.

401(k) loan: Borrowing against a retirement account lets you access cash quickly without a credit check, often at a lower interest rate. However, 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 401(k) plan allows, you can borrow up to $50,000 for your new purchase.

Find a Top Colorado Agent With Experience in Bridge Loans

Partner with a top agent who knows your Colorado market and has experience with bridge loan programs. HomeLight can connect you with an experienced buyer’s agent who can help you navigate your entire homebuying journey.

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Are there modern ways to buy a house before I sell?

With today’s technology, real estate solution companies like HomeLight incorporate bridge loans into convenient programs that streamline the process of buying and selling a house simultaneously in Colorado. These “Buy Before You Sell” programs can provide a more complete “bridge” to help you successfully move to a new home, reducing stress and worry.

Together with your agent, HomeLight can help you secure your new home with speed and certainty, while getting 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?

If you’re looking for a low-risk way to buy a home while selling your current one, several modern programs can help. These programs let homeowners purchase a new home before selling their old one, without the usual uncertainties and hassles. Consider exploring HomeLight’s innovative Buy Before You Sell program.

Watch the video below to see how our Buy Before You Sell program works:

Here is how HomeLight’s Buy Before You Sell program works for home sellers in Colorado:

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 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 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.

For Colorado homeowners caught in the buy-sell conundrum, HomeLight’s Buy Before You Sell program offers a convenient and stress-reducing solution. We also extend other services for homebuyers and sellers, 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 7 days.

A creative financing solution for Colorado homeowners

As Colorado homebuyers navigate a tight housing market and elevated home prices, some are turning to bridge loans to simplify the process of buying a new home and selling their old one.

“Definitely make sure you have a good real estate advisor who is looking at both ends of your transaction because a bridge one is not an option for everyone,” says Hall. “Lenders typically require at least twenty percent home equity to be secured, so you will be pledging your home or other assets as collateral.

Hall adds, “There’s also HomeLight Buy Before You Sell. This can be a good option for people – it may be less expensive than a bridge loan, and [buyers] can typically get a little bit more equity out.”

Consider HomeLight’s Buy Before You Sell program to remove the uncertainty from your next home purchase.

Editor’s note: This post is for educational purposes only. Reach out to your own advisor for professional financial advice and assistance in using a bridge loan in Colorado.

Writer Madeline Sheen contributed to this story.

Header Image Source: (PTHamilton/ Deposit photos)