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

Buying and selling a home simultaneously in Michigan can be an incredibly stressful experience. Homeowners often find themselves overwhelmed, juggling a long list of tasks to align the timelines for both transactions.

As you grapple with the emotional weight of leaving a beloved space, financial worries can compound the anxiety, especially since you can’t move forward with your new purchase until your current sale is finalized. The thought of incurring additional moving costs only adds to the pressure. However, innovative financing solutions can alleviate some of that pressure, offering a way to seamlessly bridge the gap between selling and buying. Enter bridge loans.

Tailored as a short-term financing option, a bridge loan in Michigan offers the flexibility to purchase your new dream home before you’ve sold your current one, easing the transition and reducing the stress of a double move.

DISCLAIMER: This post is intended for educational purposes, not financial advice. If you need assistance navigating the use of a bridge loan in Michigan, HomeLight encourages you to reach out to your own advisor.

What is a bridge loan, in simple words?

Imagine you’ve found your dream home in Michigan, but you’re still waiting to sell your current house. This is where a bridge loan comes into play. A bridge loan is a short-term financial solution designed to “bridge the gap” between selling your existing home and purchasing your new one. It leverages the equity in your current home, providing you with the necessary funds for a down payment and covering closing costs on your new property.

Bridge loans are sometimes referred to as gap financing or swing loans.

While they tend to be pricier than traditional mortgages, bridge loans offer a quick and convenient way to secure your new home without the wait to sell your old one. This type of financing is a strategic tool for making your transition smoother and less stressful.

How does a bridge loan work in Michigan?

When would you consider a bridge loan? Typically, when you’re ready to buy a new home and your current one hasn’t yet sold. This is a common predicament, especially in a market where timing doesn’t always align perfectly. In this scenario, the equity from your existing home is used to help finance your new property’s down payment and closing costs.

The same lender handling your mortgage for the new home will often manage your bridge loan. They usually require that your current home be actively listed for sale, offering the bridge loan for a period ranging from six months to a year.

An important factor in this process is your debt-to-income ratio (DTI). This ratio is calculated by including your old and new home’s mortgage payments and any interest-only payments on the bridge loan. This calculation helps lenders assess your ability to manage payments on both properties simultaneously, a crucial consideration since there’s always a chance your current home might not sell immediately.

In some cases, if your existing home is already under contract and the buyer has secured their loan, the lender might only consider the mortgage payment for your new home in the DTI calculation. This flexibility can be a significant relief, ensuring you’re not overstretched financially during the transition period.

What are the benefits of a bridge loan in Michigan?

Bridge loans offer several advantages that can make your home-buying experience more flexible and less stressful. Here are some key benefits:

You can make a non-contingent offer: An offer without conditions is more attractive to sellers, thereby increasing your chances of being able to buy the home.
You only have to move once: Avoid the hassle and cost of temporary housing.
You can prepare your old home for sale after moving out: This can help you stage and sell your home more effectively.
Some lenders don’t require payments during the loan period: This eases financial pressure while you transition.
You can move on the right property quickly: Don’t miss out on your dream home while the sale status of your current one is pending.

These benefits make a bridge loan an appealing option for Michigan buyers who need financial flexibility before selling their previous home. Ultimately, they can use the sale proceeds to settle the bridge loan.

What are the drawbacks of a bridge loan?

While bridge loans can be the right solution for handling the transition between selling your current home and purchasing a new one, they have certain drawbacks. It’s essential to weigh these cons carefully:

You incur additional loan costs: Expect underwriting fees, origination fees, and other associated costs.
You deal with increased financial stress: Managing payments for up to two mortgages plus a bridge loan can be challenging.
Qualifying may be more difficult: Approval criteria for bridge loans are often stricter than traditional mortgages.
Underwriting can be slow: The process might take longer than anticipated, affecting your timelines.
You must satisfy equity requirements: Your qualification heavily depends on the equity in your current home. Owing more than 80% of your home’s value could be a disqualifier.

Understanding these potential drawbacks is crucial in deciding whether a bridge loan suits your financial situation and home-buying strategy.

When is a bridge loan a good solution?

A bridge loan isn’t always the go-to option for every real estate transaction, but it can significantly ease the transition from your old home to a new one in specific scenarios. Here are some situations where a bridge loan might be particularly beneficial:

Equity access: You need the equity from your current home for a new home’s down payment.
Reduced moving costs: You can’t afford a double move, and interim housing or bridging the sale and purchase timelines is essential.
Time pressure: Your dream home just hit the market, and you want to take immediate action, bypassing competitive delays.
Contingency woes: Your offer’s home sale contingency has been a deal-breaker, and you want immediate purchasing power.
Staged space: You want to sell an empty or staged home, which is often more lucrative and convenient. This is particularly relevant if you cannot prepare or stage your current home while still living in it. A bridge loan can provide the funds to move into your new home, allowing you to stage and sell your old home in its best possible light.