Bridge Loans in Denver: How to Unlock Home Equity to Buy Before You Sell
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Joseph Gordon EditorJoseph Gordon is an Editor with HomeLight. He has several years of experience reporting on the commercial real estate and insurance industries.
Navigating the real estate market in Denver can feel like a high-wire act, especially when juggling selling your current home with purchasing a new one. This balancing act becomes even more challenging in a market with low inventory and high prices. It’s a common dilemma: you must sell to finance your next home, but where do you live? It might seem like your only option is to sell, move out, and temporarily settle somewhere else while hunting for that perfect new house.
But a potential solution to this buy-sell conundrum is a bridge loan. This short-term financing tool could be the very thing you need to bridge the gap, allowing you to buy your house in Denver before you’ve sold your old one. With a bridge loan, you might find the pieces of your real estate puzzle fitting together more seamlessly than you thought possible.
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 Denver, HomeLight encourages you to reach out to your own advisor.
What is a bridge loan, in simple words?
Understanding a bridge loan can be key to smoothing out your transition between homes in real estate. Essentially, it’s a short-term loan that helps you buy a new home while you’re still selling your current one. Think of it as a financial bridge that connects your old home to your new one.
This loan leverages the equity in your existing home, providing the funds needed for a down payment and covering the closing costs on your new home purchase. While bridge loans are typically pricier than conventional mortgages, they offer a significant advantage: they allow you to make your new purchase promptly, without waiting for your old home to sell. This can be a game-changer in fast-paced markets like Denver.
How does a bridge loan work in Denver?
Imagine you’re in Denver, ready to move into your dream home, but there’s a catch: your current home hasn’t sold yet. This is where a bridge loan steps in. It uses the equity from your previous Denver home to help cover the down payment and closing costs for your new abode.
Often, the same lender working on your new mortgage will also manage your bridge loan. They’ll need to see that your old home is actively on the market and typically offer the bridge loan for a duration ranging from six months up to a year.
Here’s where the debt-to-income ratio (DTI) becomes crucial. Lenders will calculate your DTI to include your existing mortgage payments, the payments for your new Denver home, and any interest-only payments on your bridge loan. However, if your old home is already under contract and the buyer has secured loan approval, your lender might consider only the new mortgage payment in the DTI calculation.
This approach ensures you can comfortably manage payments on both properties, providing a safety net in case your old home doesn’t sell as quickly as expected. This flexibility can be particularly important in the dynamic Denver real estate market.
What are the benefits of a bridge loan in Denver?
Bridge loans in Denver offer several advantages that can streamline your home-buying process:
- You can make a non-contingent offer: This enhances your competitiveness in the Denver market.
- Only one move is required: You move directly from your old home to the new one, skipping temporary housing.
- Prepare your old home easily: After moving out, you have more space and time to prepare your old home for sale, including staging.
- No payments during the loan period: Some lenders offer a payment-free period, easing financial pressure.
- Quick action on desired properties: You can move swiftly on a property in Denver without being held back by the sale status of your current home.
These benefits make bridge loans an appealing choice for Denver buyers who need financial flexibility before selling their previous home, allowing them to clear the loan with the proceeds from the sale.
What are the drawbacks of a bridge loan?
While bridge loans offer flexibility in your home-buying journey, they also come with certain drawbacks worth considering:
- Additional loan costs: Involves various fees such as underwriting and origination.
- Increased financial burden: You may face the stress of juggling payments for two mortgages plus a bridge loan.
- Stricter qualifying criteria: Getting approved for a bridge loan can be tougher than a traditional mortgage.
- Potential for slower underwriting: The process may take longer than expected, which could delay your plans.
It’s important to note that lenders will assess the equity in your current home to determine your borrowing capacity. If your mortgage debt exceeds 80% of your home’s value, you might face challenges qualifying for a bridge loan.
When is a bridge loan a good solution?
A bridge loan isn’t always the right choice for every real estate scenario, but it can significantly ease the transition from your old home to a new one in certain situations.
Scenarios where a bridge loan might be beneficial:
- You need your current home’s equity for the down payment on a new home.
- Affording a double move and interim housing is challenging, or syncing the sale and purchase timelines is crucial.
- Your ideal home is on the market, and you want to act fast, avoiding competition delays.
- Your offer’s home sale contingency has hindered deals, and you seek immediate buying power.
- Selling an empty or staged home is preferable, yielding better results and convenience.
- You cannot prepare or stage your current home for sale while still living in it, affecting its market appeal and potentially its selling price. A bridge loan allows you to move out, stage the home effectively, and potentially secure a higher sale price.
What’s required to get a bridge loan in Denver?
To qualify for a bridge loan in Denver, you typically need to meet these criteria:
- Qualifying income: Your lender will assess your income to ensure you can manage payments on your current and new mortgage, plus any bridge loan payments.
- Sufficient equity: At least 20% equity in your current home is necessary, though some lenders might ask for up to 50%.
- Good credit history: A credit score above 650 is generally required, influencing your interest rate and other loan terms.
- Your current home listed for sale: Some lenders may need evidence that your current home is on the market to ensure its sale within the bridge loan period.
How much does a bridge loan cost in Denver?
A bridge loan in Denver generally comes with a higher interest rate than a traditional mortgage. You can expect interest rates to be about 1-3 percentage points higher than those of a standard mortgage loan. In addition to this, bridge loans may incur various transaction fees.
This increased cost is due to the higher risk associated with bridge loans. As a borrower, it’s important to be prepared for scenarios where your home might not sell within the expected timeframe. In such cases, you’ll need the financial capacity to simultaneously cover your mortgage and bridge loan payments.
The specific rate you’ll be offered often depends on your credit score and your chosen lender.
How to reduce bridge loan costs
One way to potentially reduce costs is by applying for a bridge loan with the same lender as your new mortgage. This could eliminate the need for separate underwriting and additional mortgage fees, as both loans will be processed together.
It’s advisable to compare options across different lenders. Remember, bridge loans are designed for short-term use. Evaluate each option not just by total cost but also for convenience and suitability to your specific situation. Additional financing options will be discussed later in this article.
Budget for closing costs
Apart from the loan, you’ll also need to budget for closing costs, and legal and administrative fees. These typically range 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
These costs are essential to your financial planning when considering a bridge loan in Denver.
Bridge loan cost example
Below is an example of how much a $290,000 bridge loan might cost, along with possible fees.
You find a home you’d like to purchase but still wait for your current Denver house to sell. The asking price for the new home is $590,000. You can only come up with $300,000, but you have at least another $290,000 worth of equity in your current property. You want to access that money to cover the shortfall before selling your new home to another buyer.
| Net loan amount | $290,000 | $290,000 |
| Interest (varies) | 10% (example for 6 months) | $14,500 |
| Origination fee | 1.5% | $4,350 |
| Underwriting fee | $1,000 | $1,000 |
| Appraisal fee | $700 | $700 |
| Closing cost* | 2% | $5,800 |
| Total repayable amount | $316,350 |
*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 Denver?
In Denver, the availability of bridge loans might be more limited due to their specific underwriting requirements. If you’re considering this financing option, exploring various lenders is wise. The most common sources for bridge loans include:
- Your mortgage lender: Your current mortgage provider can often offer a bridge loan.
- Local banks: Many local banks in Denver provide bridge loans with varying terms.
- Credit unions: These member-focused institutions can be a source for bridge loans.
- Hard-money lenders typically offer loans with shorter terms and higher interest rates.
- Non-qualified mortgage (non-QM) lenders: These lenders cater to borrowers who don’t fit traditional lending criteria.
Modern real estate companies in Denver also offer services to help you secure a bridge loan, ensuring a smoother transition between selling and buying a home. More on how this works will be discussed later in this article.
Are there alternatives to bridge loans in Denver?
While a bridge loan might not work for every Denver 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 immediately, 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 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 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 and second mortgage out simultaneously 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 has 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 must include this monthly payment when calculating your debt-to-income ratio. If your 401k plan allows, you can borrow up to $50,000 for 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 Denver. 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.
With your Denver 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. Check with your agent to see if HomeLight Buy Before You Sell is available.
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 Denver:
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
- Flexibility in timelines: 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.
- Sell for up to 10% more: After you move, you can list your old home unoccupied and potentially staged, which can lead to a higher selling price, according to HomeLight transaction data.
HomeLight’s Buy Before You Sell program offers a convenient and stress-reducing solution for Denver homeowners caught in the buy-sell conundrum. Learn more program details at this link.
HomeLight also offers other services for homebuyers and sellers in Denver, 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 Denver homeowners
As Denver homeowners face the challenges of a tight housing market and rising home prices, many are discovering the advantages of bridge loans. These loans allow you to leverage the equity in your previous home, easing the pressure of selling before buying your new home. This financial flexibility gives you more time to sell, significantly reducing the stress of perfect timing.
However, while bridge loans offer convenience in transitioning between homes, they’re not without costs and might not suit everyone’s financial situation.
Consider HomeLight’s Buy Before You Sell program for a more streamlined approach. It’s designed to alleviate the uncertainty of your next home purchase. Furthermore, HomeLight can connect you with a top Denver real estate agent experienced in handling bridge loans, ensuring you have expert guidance every step.
Header Image Source: (Colin Lloyd / Unsplash)
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