Maximize Equity in Minnesota: Bridge Loans Help You Buy Before You Sell

How does a bridge loan work in Minnesota?

Imagine you’re ready to move into your dream home in Minnesota, but your current house hasn’t sold yet. With a bridge loan, you can borrow money against the value of your current home to cover your down payment and closing costs, so you don’t have to let that perfect place slip away. These short-term loans usually last six months to a year and are paid off once your old home sells.

Often, the same lender managing your new mortgage will also handle your bridge loan. They typically want to see your current home actively listed for sale. Moreover, they will assess 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 examine 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?

A bridge loan can be a useful tool when you’re trying to buy and sell at the same time in Minnesota’s competitive market. It helps you move quickly, avoid contingencies, and keep the process feeling a lot less stressful. Here’s a breakdown of some benefits:

These benefits make bridge loans a real lifesaver for Minnesota homeowners who need extra cash before selling their current home. They let you manage your finances more easily, using the sale proceeds of your old home to pay off the loan later.

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:

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 is something to keep in mind as it directly affects 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.
• You think 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.
• You need more immediate purchasing power, as the contingency clauses in your offers turn off sellers.
• 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.
• Currently listed home: 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. There may also be additional transaction fees.

This 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.

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.

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

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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: Hard money lenders in Minnesota extend 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, more modern real estate companies offer 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?

If you think a bridge loan doesn’t fit your unique situation, here are some alternatives to consider:

Home equity loan: A home equity loan, sometimes called an 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 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 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 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 move to a new home, reducing stress and worry.

Together with your Minnesota agent, HomeLight can 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?

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

Here are the simple steps to using HomeLight’s Buy Before You Sell program in Minnesota:

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.

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, designed to highlight its best features, can sell for more money 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. 

We also extend other services for homebuyers and sellers, 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 7 days. You might also try HomeLight’s Net Proceeds Calculator as you plan your home sale.

A creative financing solution for Minnesota homeowners

Several Minnesota homeowners use bridge loans to make buying a new home while selling their current one a lot easier. With this short-term loan, you can use the equity in your current home as a financial cushion, so you don’t feel rushed to sell before buying. It gives you a bit of breathing room and a smarter way to move into your next place without the stress.

That said, bridge loans aren’t for everyone. They can come with extra costs and certain financial requirements. If you want an even smoother, less stressful experience, check out HomeLight’s Buy Before You Sell program, which helps take the guesswork out of your next home purchase.

HomeLight can also 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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