Many Illinois homeowners find themselves in a tricky situation when selling their home while buying another one. You want to get the best price for your current place, but you also don’t want to miss out on that perfect new home.
The pressure mounts as you navigate the delicate balance of selling fast enough to finance your next move, because otherwise, you end up with multiple loan payments, a temporary rental, and several moves, creating unnecessary financial stress. In such a scenario, a modern solution can be helpful: bridge loans in Illinois.
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This short-term financing option lets you purchase your new home before you sell your current one, smoothing out the transition and alleviating the stress of timing in the real estate market. In this post, we’ll provide insights and helpful tips about bridge loans in Illinois.
What is a bridge loan?
A bridge loan is a financial tool designed to help you buy a new home while still owning your current one. It leverages the equity in your current home to provide the cash you need for a down payment and closing costs.
Think of a residential bridge loan as a temporary financial lifeline. It acts as a bridge, filling the gap between the sale of your old home and the purchase of your new one. This can be particularly useful in a competitive market like Illinois, where timing is crucial.
Typically, bridge loans last anywhere from six months to a year. They have higher interest rates compared to traditional mortgages due to their temporary nature and the higher risks involved for lenders. Despite this, for many Illinois homeowners, the benefits and convenience of a bridge loan can make it a valuable option during the homebuying process.
How does a bridge loan work in Illinois?
In many cases, the same lender handling your new mortgage in Illinois will also offer the bridge loan. They look at your debt-to-income ratio (DTI), particularly the payments on both your current and new mortgages, plus any interest-only payments on the bridge loan. This calculation helps them assess your ability to handle payments on both properties simultaneously.
Because DTI plays such a big role, lenders usually require your current home to be on the market. And if that home is already under contract with the buyer’s loan approved, some lenders may count only your new mortgage payment in the DTI, which can make qualifying much easier.
What are the benefits of a bridge loan in Illinois?
Bridge loans in Illinois offer several advantages, making them an appealing option for homebuyers balancing the timing and financial challenges of buying a new home while selling their old one. Here are some key benefits:
- Make a non-contingent offer: An offer not dependent on the sale of your home increases your competitiveness as a buyer in Illinois’ competitive real estate market.
- Move only once: Avoid the hassle and expense of moving twice or finding temporary housing.
- Get your home ready to sell: After moving out, you have the time to prepare your home for sale.
- Maximize loan payment flexibility: Some Illinois lenders offer a period without required payments, easing your financial burden.
- Act quickly on ideal properties: Secure your new home in Illinois without waiting for your old one to sell.
These perks make a bridge loan a handy option for Illinois homeowners who need financial flexibility before they can get the proceeds from their home sale. It gives you the breathing space to move forward in the housing market with more confidence.
What are the drawbacks of a bridge loan?
While a bridge loan can be a helpful tool for transitioning between homes, it’s important to be aware of its potential drawbacks. Here are some key considerations:
- Incur additional loan costs: Expect fees like underwriting and origination, adding to the overall expense.
- Face increased financial stress: Juggling payments for two mortgages plus a bridge loan can strain your finances.
- Navigate tougher qualification criteria: Qualifying for a bridge loan can be more challenging than for a traditional mortgage.
- Deal with a slower underwriting process: The approval timeline might be longer than anticipated, affecting your plans.
- Satisfy equity requirements: Your eligibility depends on the equity in your current home. Owing more than 80% can be a disqualifier.
Remember, a bridge loan isn’t the right fit for everyone, and it comes with extra costs and responsibilities. Understanding what’s involved helps you decide if it works for your situation.
When is a bridge loan a good solution?
A bridge loan isn’t always the go-to option for every home sale or purchase, but in certain scenarios, it can significantly ease the transition from your old home to your new one. Here are some instances where a bridge loan might be a particularly good fit:
- You need equity from your current home to fund the down payment for a new property.
- You can’t afford a double move and temporary housing, so timing alignment is crucial.
- Your dream home hits the market, and if you don’t act fast, you could miss out in a competitive market.
- You need a stronger buying power, as your previous offers have fallen through due to home sale contingencies.
- You prefer to sell your home empty or staged, which could result in a faster sale and potentially higher offers.
What’s required to get a bridge loan in Illinois?
To secure a bridge loan in Illinois, certain criteria typically need to be met. Here’s what lenders usually look for:
- Qualifying income: Lenders will assess your income to ensure you can manage payments on your existing mortgage, your new mortgage, and any bridge loan payments.
- Sufficient equity: You’ll need at least 20% equity in your current home, though some lenders might ask for up to 50%.
- Good credit history: A credit score above 650 is often necessary, influencing your interest rate and loan-to-value ratio. The higher your score, the better your terms might be.
- Current home listed for sale: While not always a requirement, many lenders prefer that your current home is on the market, ensuring its sale by the end of the bridge loan term.
How much does a bridge loan cost in Illinois?
In Illinois, the cost of a bridge loan typically carries a higher interest rate compared to a standard mortgage. You can expect the interest rate to be 1 to 3 percentage points more than what you would qualify for on a mortgage.
Additionally, bridge loans often come with various transaction fees.
The increased cost reflects the higher risk assumed by lenders.
Consider what happens if your current home doesn’t sell as quickly as expected. You could end up paying both your mortgage and the bridge loan at the same time. That’s why it’s a good idea to make sure you’re financially ready for this possibility.
Your specific rate will largely depend on factors such as your creditworthiness and the lender you choose to work with.
How to reduce bridge loan costs
If you obtain a bridge loan from the same lender as your new mortgage, you might avoid additional underwriting or mortgage fees. This is because both your bridge loan and new mortgage will be processed together.
To save even more, shop around and compare lenders, keeping in mind not just the costs but also how convenient and suitable each option is for you. We’ll look at more financing choices in the next section.
Budget for closing costs
Along with the loan itself, you will need to budget for closing costs, legal, and administrative fees. These expenses typically range from 1.5% to 3% of the loan amount. Common fees 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 $200,000 bridge loan might cost, along with possible fees.
Let’s say you find a home you’d like to purchase, but you’re still waiting for your current Illinois house to sell. The new home’s asking price is $300,000. You can only come up with $100,000, but you have at least another $200,000 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 | $200,000 | $200,000 |
| Interest (varies) | 10% (example for 6 months) | $10,000 |
| Origination fee | 1.5% | $3,000 |
| Underwriting fee | $1,000 | $1,000 |
| Appraisal fee | $500 | $500 |
| Closing cost* | 2.1% | $4,200 |
| Total repayable amount | $218,700 |
*These closing costs typically range between 1.5% and 3%
Who provides bridge loans in Illinois?
In Illinois, not every financial institution offers bridge loans due to their specific underwriting requirements. However, for those interested in obtaining a bridge loan, there are several types of lenders to consider. Here are the most common sources for bridge loans in the state:
- Your mortgage lender: Often, the lender who handles your mortgage can also provide a bridge loan.
- Local banks: Many community and regional banks in Illinois grant bridge loans with varying terms.
- Credit unions: Member-owned credit unions sometimes offer bridge loans with competitive rates.
- Hard-money lenders: Hard-money lending institutions in Illinois issue loans based on collateral property value rather than creditworthiness.
- Non-qualified mortgage (non-QM) lenders: These lenders provide loans that don’t meet traditional underwriting standards.
Are there alternatives to bridge loans in Illinois?
A bridge loan might not work for every Illinois homeowner’s unique situation. It’s worth exploring these alternative financing options:
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 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 your retirement account comes with some benefits and drawbacks. You’ll avoid early withdrawal penalties, but 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 Illinois. These “Buy Before You Sell” programs can provide a more complete “bridge” to help you successfully move to a new home, thus reducing stress and worry.
Together with your Illinois 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.
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 Illinois:
- 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 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.
- Sell your current home with peace of mind: After you move into your new home, we will list your vacant 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’s 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 home sale earnings: After you move, you can list your old home unoccupied and potentially staged, which can lead to more earnings.
For Illinois 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 Illinois, 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. You might also want to try HomeLight’s Net Proceeds Calculator as you plan your home sale.
A creative financing solution for Illinois homeowners
Buying and selling a home at the same time can be tricky, especially with high prices and a competitive market in Illinois. That’s where bridge loans come in. They let you tap into the equity in your current home so you can buy your next one without rushing. This gives you more breathing room to sell your old place on your own timeline, making the whole process a lot less stressful.
However, while bridge loans can be highly convenient for navigating this transition, they come with their costs and might not suit everyone’s circumstances. Use HomeLight’s Agent Match tool to connect with experienced Illinois real estate agents who specialize in bridge loan transactions and ensure expert guidance every step of the way.
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