Bridge Loans in Iowa: How to Unlock Home Equity to Buy Before You Sell
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Joseph Gordon Associate EditorJoseph Gordon is an Associate Editor with HomeLight. He has seven years of experience reporting on the commercial real estate and insurance industries. He holds an MFA in Creative Writing from the University of San Francisco.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Selling your old home while simultaneously buying a new one in Iowa can often feel like a delicate balancing act. In a market where inventory is limited, and prices are high, syncing the timing and finances of both transactions becomes a significant challenge. For many homeowners, the apparent solution is to sell, move to a temporary location, and search for a new house.
But there’s an alternative that might just be the solution you’re looking for: a bridge loan. This short-term financing option allows you to confidently purchase your new Iowa home before selling your current one, easing the transition and helping you manage this crucial phase in your homeownership 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 Iowa, HomeLight encourages you to reach out to your own advisor.
What is a bridge loan, in simple words?
A bridge loan, also known as bridge financing, bridging loan, interim financing, gap financing, or a swing loan, is essentially a financial lifeline for homeowners like you. It’s a short-term loan designed to bridge the gap during the transition period of buying a new home while still selling your current one. This type of loan leverages the equity in your existing home, providing you with the necessary funds to make a down payment and cover closing costs on your new property.
While they are typically more expensive than traditional mortgages, bridge loans offer a swift and convenient solution, allowing you to purchase your new home without waiting for your old one to sell. This financial tool can be a game-changer in ensuring a smooth transition between homes.
How does a bridge loan work in Iowa?
In Iowa, a typical scenario for needing a bridge loan arises when you find your dream home but haven’t sold your current one yet. In this situation, the equity from your existing home is used to cover the new property’s down payment and closing costs.
The lender providing the mortgage for your new Iowa home will often manage your bridge loan. They usually require that your current home be listed for sale and will extend the bridge loan for six months to a year.
A critical aspect for the lender is your debt-to-income ratio (DTI). This ratio will include the payments on your existing mortgage, the payments for your new home, and any interest-only payments on the bridge loan. However, if your current home is under contract with a buyer who has secured their loan, the lender may only consider the mortgage payment for your new home in the DTI calculation.
This is important for lenders as they must ensure you can manage payments on both properties if your current home doesn’t sell immediately. For you as a homeowner in Iowa, understanding this aspect of bridge loans is crucial in planning your finances during this transitional period.
What are the benefits of a bridge loan in Iowa?
In Iowa, a bridge loan can offer several advantages that make your home-buying experience more flexible and less stressful. Here are some key benefits:
- You can make a non-contingent offer on your new home: This strengthens your offer in a competitive market.
- Only one move is required: Avoid the hassle and cost of moving twice.
- Prepare your old home for sale post-move: Enhance your home’s market appeal without the pressure of living there.
- Potential for no payments during the loan period: Some lenders offer this feature, easing your financial burden.
- Act quickly on the right property: Don’t wait for your current home to sell before securing your new one.
These benefits make a bridge loan a practical solution for Iowa buyers who need financial flexibility before selling their existing home, allowing them to use the sale proceeds to settle the bridge loan.
What are the drawbacks of a bridge loan?
While bridge loans offer a strategic solution for buying a new home before selling your current one, they come with certain drawbacks that are important to consider:
- Additional loan costs: Expect underwriting fees, origination fees, and other associated costs.
- Increased financial burden: Managing payments for up to two mortgages plus a bridge loan can be stressful.
- Stricter qualification criteria: Qualifying for a bridge loan can be more challenging than for a traditional mortgage.
- Potentially slow underwriting process: The approval process might take longer than anticipated.
- Equity requirements: Lenders assess the equity in your current home. Owing more than 80% of its value could disqualify you.
Understanding these potential challenges is crucial in determining whether a bridge loan is the right financial move for your situation.
When is a bridge loan a good solution?
A bridge loan can be an ideal solution in several specific real estate scenarios, particularly when timing and financial flexibility are key factors. Here are some situations where a bridge loan might be the right choice:
- You need the equity from your current home to make a down payment on a new one.
- Affording a double move and interim housing isn’t feasible, making a seamless transition necessary.
- Your ideal home is on the market, and you must act fast to avoid competitive bidding.
- Your offers on new homes keep getting rejected due to home sale contingencies.
- Selling your home empty or staged, which can often be more appealing to buyers and potentially more profitable, is easier when you’ve relocated.
In these cases, a bridge loan provides the necessary financial support to bridge the gap between selling your current home and securing your new one, especially when you cannot prepare or stage it for sale while still living in it. This can be a significant advantage, as well-prepared and staged homes often sell faster and for higher prices.
What’s required to get a bridge loan in Iowa?
To qualify for a bridge loan in Iowa, you typically need to meet the following criteria:
- Qualifying income: Lenders will assess your income to ensure you can handle payments on your current mortgage, new mortgage, and the bridge loan.
- Sufficient equity: You need at least 20% equity in your current home, though some lenders may require as much as 50%.
- Good credit history: A credit score above 650 is usually necessary, influencing your interest rate and other loan terms. A higher score is always advantageous.
Your current home listed for sale: Many lenders require that it is on the market, ensuring it’s likely to sell within the bridge loan term.
How much does a bridge loan cost in Iowa?
In Iowa, the cost of a bridge loan typically carries a higher interest rate than a standard mortgage. You can expect interest rates to be about 1-3 percentage points higher than regular mortgage loans. Additionally, bridge loans may include various transaction fees.
The reason for these higher costs is the increased risk that lenders take on with bridge loans. It’s important to consider the possibility that your current home may not sell within the expected timeframe. If this happens, you’ll need to be financially prepared to cover your mortgage and bridge loan payments simultaneously.
The specific rate you’ll be offered largely depends on your creditworthiness and your chosen lender.
How to reduce bridge loan costs
Applying for a bridge loan with the same lender as your new mortgage can lead to cost savings. In such cases, you might not have to pay additional underwriting or other mortgage fees, as your bridge loan and new mortgage will be processed together.
It’s advisable to shop around and compare options. Remember, bridge loans are meant as a short-term solution. Choosing a financing option that not only offers favorable costs but also aligns with your convenience and specific circumstances is crucial.
Budget for closing costs
Apart from the loan itself, you’ll also need to budget for closing costs, legal, and administrative fees. 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
Understanding these costs upfront will help you budget effectively and avoid any surprises during the bridge loan process.
Bridge loan cost example
Below is an example of how much a $150,000 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 Iowa house to sell. The new home’s asking price is $300,000. You can only come up with $150,000, but you have at least another $150,000 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 | $150,000 | $150,000 |
| Interest (varies) | 10% (example for 6 months) | $7,500 |
| Origination fee | 1.5% | $2,250 |
| Underwriting fee | $1,000 | $1,000 |
| Appraisal fee | $700 | $700 |
| Closing cost* | 2% | $3,000 |
| Total repayable amount | $164,450 |
*These closing costs typically range between 1.5%-3%
How Much Is Your Iowa Home Worth Now?
Get a near-instant real estate house price estimate from HomeLight for free. Our tool analyzes the 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 Iowa?
In Iowa, not all financial institutions offer bridge loans due to their specific underwriting requirements. If you’re considering this type of loan, exploring options with various lenders is wise. The most common sources for bridge loans in Iowa include:
- Your mortgage lender: Start with the lender of your current mortgage; they might offer bridge loans to existing customers.
- Local banks: Many community banks in Iowa provide personalized lending services, including bridge loans.
- Credit unions: Member-focused credit unions often offer competitive loan options, including bridge loans.
- Hard-money lenders: These lenders can be a source for bridge loans, especially for borrowers with unique financial situations.
- Non-qualified mortgage (non-QM) lenders: These lenders offer loans that don’t meet the strict federal guidelines for mortgages, including bridge loans.
Additionally, some modern real estate companies offer services to help you find a bridge loan, simplifying the process of bridging the gap between buying and selling a home. More details on this will be shared later in the post.
Are there alternatives to bridge loans in Iowa?
While a bridge loan might not work for every Iowa 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 Iowa. 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 Iowa 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 in your area.
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 Iowa:
- 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 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.
- 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.
For Iowa 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 Iowa, 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 Iowa homeowners
As Iowa homeowners face the challenges of a tight housing market and rising home prices, many are considering bridge loans as a way to streamline the process of buying a new home while selling their old one.
Bridge loans offer the advantage of borrowing against the equity in your previous home, providing you with the funds needed for your new purchase. This financial flexibility gives you more time to sell your old home, easing the pressure of perfect timing in a fast-paced market.
However, while bridge loans can be a highly convenient solution for navigating this transition, they also come with higher costs and may not be suitable for everyone’s financial situation.
Consider exploring HomeLight’s Buy Before You Sell program for a more streamlined and less uncertain approach. This innovative option can alleviate much of the stress associated with your next home purchase. Additionally, HomeLight can connect you with a top-performing Iowa buyer’s agent who is experienced in handling bridge loans and other financing solutions.
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