Need temporary funding to help pay for your new home while you’re waiting for your current property to sell? A bridge loan can come in handy when you are trying to buy and sell at the same time.
This financing bridges the gap between these two transactions so that both can proceed smoothly.
Exactly what is a bridge loan, and how does a bridge loan work? What are the requirements for a bridge loan, how much are bridging loan rates, and what are some mortgage bridge financing alternatives?Â
What is a bridge loan?
A bridge loan is a short-term loan that enables a homeowner to tap the equity in their current home to help purchase a new property while still attempting to sell their existing property.
“Think of it as basically a financial sprint,” says Ryan Zomorodi, co-founder of RealEstateSkills.com. “This is short-term, high-interest gap financing that typically lasts six to 12 months. You tap into the equity of your current home to fund the down payment on a new one before you actually sell.”
Interest rates on bridge loans can be fixed or variable. Be aware that rates on bridge loans are typically much higher than standard mortgage loan rates, often 2 to 4 percentage points higher.
“That’s because bridge loans carry a higher risk to the lender than a traditional 30-year fixed-rate mortgage loan,” says Todd Christensen, a housing counseling and education manager.
Additionally, lenders can charge closing costs, including an origination fee that may tack on an additional 1% to 2% of the loan amount.
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How does a bridge loan work?
When you take out a bridge loan, plan to pay closing costs and possibly the first month’s interest when you close on the loan. Many bridge loans don’t require you to make monthly payments during the loan term, while others require interest-only payments with the principal deferred.
But this doesn't mean they save money. After the term ends, you’ll need to repay your full principal as well as any accrued interest, which typically comes from the proceeds of your home sale.
Bridge loan example
Let’s say you own a home worth $400,000, for which you still owe $200,000 in mortgage debt. You want to purchase a new home priced at $500,000, but your cash is tied up.
“Here, the good news is that you are sitting on $200,000 of equity in your current home,” notes Zomorodi. “A bridge loan allows you to unlock that equity right now to pull out cash for a 20% down payment – $100,000 – on the $500,000 home. You will own two homes for a few months, but the moment your old house sells, the proceeds can instantly go to pay off your old mortgage as well as the bridge loan.”
When to consider a bridge loan
A bridge loan can be a worthy option if you are determined to move and have located an ideal home to purchase, but have yet to sell your existing property. That’s especially true in a competitive market where sellers prefer non-contingent offers.
 It can also be a good strategy when timing and logistics are important, such as if you want to bypass renting temporarily and avoid multiple moves. Bridge loans also come in handy when you are attempting to flip a house or investment property, or you need extra closing cost dollars.
Good candidates for bridge loans include homeowners with substantial equity, well-developed credit, and quick exit strategies for the properties they currently own, according to personal finance expert Bhavin Swadas.
“Bridge loans tend to be a good fit for borrowers who require a bit more flexibility and increased levels of confidence, especially in circumstances where you don’t want to be held up by an ongoing home sale,” Swadas explains.
Bridge loans are also useful for borrowers with strong credit who need flexibility in timing rather than long-term financing.
“You should have a clear plan for selling your existing home quickly and a need to act fast in a competitive market where you cannot wait for your current home to close,” continues Christensen.
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Requirements for a bridge loan
While requirements can vary from lender to lender, most bridge loan borrowers typically need:
- Good credit. Typical lender guidelines may require a credit score around 680 or higher, but criteria vary by lender and market
- A manageable debt-to-income ratio of 43% or less – a number that can also vary by lender and market
- Sufficient equity in your home for sale of 20% to 30% or more
- Sufficient income or financial reserves to handle payments until the original home sells
“Bridge loan lenders don’t analyze you as a standard bank does. They care way less about your W-2 income and way more about your equity spread,” Zomorodi says. “They will still check your credit, but they are much more lenient on your debt ratios because they know this is a short-term flip, not a 30-year marriage. They are betting on your home selling, not on your monthly paycheck.”
How to apply for and use a bridge loan
To get a bridge loan, you can apply through participating lenders like banks, credit unions, and specialty lenders that may offer this financing. Be prepared to submit documentation for both your current home and the new property you want to buy.
“You’ll need to confirm that you have the necessary equity and credit to be eligible before proceeding with an application. The lender will conduct its own review of your financial position, real estate assets, and sales strategies to evaluate the envisioned property in question,” Swadas notes.
Count on receiving the money from a bridge loan in a lump sum at closing – not before or in installments. These funds are typically dispersed to your title or escrow company. You can then use the dollars immediately at the closing of your new home purchase, applying the funds to the down payment, paying off your existing home’s mortgage, or paying closing costs.
Here’s a quick breakdown of the typical steps involved:
- Determine your home-equity level.
- Shop around for a lender.
- Get preapproved.
- Submit a loan application.
- Await an underwriting decision.
- Carefully review loan costs and terms.
- Close on the bridge loan.
- Apply the funds received at your purchase closing toward your down payment, closing costs, or existing mortgage payoff.
- Sell your current property or refinance.
Pros and cons of a bridge loan
As with any type of financing, bridge loans have their benefits and drawbacks. Let’s take a closer look at each.
Pros of the bridge loan
– Flexibility. “You pay for the speed and convenience of not having to first sell your home,” says Zomorodi. You also don’t have to worry about including a sale contingency in your home offer.
– Ability to quickly tap your home’s accrued equity without needing to refinance.
– Leverage. You can make a stronger purchase offer on a new home with the additional funds.
– Convenience. You can avoid temporary housing by being able to close and move into your next home quickly. “You won’t have to rent for a few months and move twice,” Zomorodi says.
– Peace of mind. “Bridge loans ease the timing of the closing and lower the overall stress in a transaction where everything is happening quickly,” says Swadas.
Cons of a bridge loan
– Higher costs. Bridge loan interest rates are typically much higher than rates charged for other mortgage or home equity financing options. Additionally, you have to pay closing costs and associated fees.
– Short repayment timelines. The typical term is between six and 12 months, at which time the loan must be repaid.
– Increased financial risk if your current home doesn’t sell as expected.
– Financial pressure. “You are technically carrying three debts at once: your old mortgage, your new mortgage, and the bridge loan payments. If your old house sits on the market for six months, those interest payments can burn through your savings quickly,” cautions Zomorodi.
Bridge loan alternatives
When you need extra cash to bridge the gap between two home transactions, a bridge loan isn’t your only option. Instead, consider the following:
- Include a sale contingency in your home offer. “However, not all home sellers are willing to agree to contingencies like this,” says Christensen.
- Get a home equity line of credit (HELOC). This financing also enables you to tap into your home’s equity, but the variable interest rate charged can increase your risk of default if rates rise higher than expected, which is why you should crunch the numbers carefully. “Plus, a home equity line of credit it can increase your debt-to-income ratio, which means qualifying for a mortgage in the new home could be compromised,” Christensen cautions.
- Pursue a rent-back agreement. “This involves selling your home first, but negotiating to remain there as a renter for 60 days after closing. This puts the cash in your hand for the new purchase but buys you enough time to move without taking on expensive short-term debt,” says Zomorodi.
- Pursue a short-term rent-to-own agreement with the seller. Here, you would move into the new home as a paying renter while securing the right to purchase the property within a defined period – typically a few months to one year. The seller may agree to allow a portion of your rent payments to be credited toward the future purchase price. “However, most sellers want the sale upfront, and getting a good rent-to-own agreement requires very careful consideration and supervision from an attorney experienced in such contracts.”
Bridge loan FAQs
How is a bridge loan different from a traditional mortgage?
A traditional mortgage loan often takes decades – typically up to 30 years – to pay off. Bridge loans are designed to be paid off within six to 12 months. Many bridge loans require interest-only payments beginning the first month, while others allow for no payments until the first home sells, meaning the balance can grow significantly due to high interest rates. Also, traditional mortgages are heavily regulated based on your ability to pay monthly, whereas bridge loans are “asset-based,” meaning the lender is focused on the property value because they know they will be repaid in full as soon as the property sells.
What interest rates do bridge loans typically have?
Bridge loan interest rates can be fixed or adjustable. Bridge loans typically charge 2 to 4 percentage points higher than the going rate for a 30-year mortgage.
How do you repay a bridge loan once your home sells?
Your bridge loan is usually automatically paid back in full at the closing of your current home’s sale. When the buyer of your current home pays for the property, your escrow officer or title company will take those dollars, pay off your old mortgage and the bridge loan on your behalf, and then wire you whatever profit remains.
The bottom line
When you need to act quickly on a home for sale in a competitive market, but also have an existing home to unload, a bridge loan can be a powerful short-term financing resource that offers flexibility, speed, and convenience, allowing you to handle both transactions with less stress.
But you’ll pay for these perks in the form of a higher interest rate and fees, along with a shorter repayment window.
Take the time to carefully compare the advantages versus disadvantages as well as alternatives like a HELOC, rent-back agreement, or sale contingency.
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This article is for informational purposes only and is not a commitment to lend. Bridge-loan availability, terms, and eligibility vary by lender and state. Any rate or cost references are illustrative, not quotes, and subject to change. Qualification depends on credit, income, assets, property, and underwriting. If Better Mortgage does not offer bridge loans in your area, we can help you evaluate alternatives. If payments are referenced, taxes and insurance are not included; your actual payment will be higher. “Pre-approval” refers to a conditional determination based on the information provided and is not a firm offer of credit.