Bridge Loan: What Is It and How Does It Work?

A bridge loan is a short-term loan that allows you to purchase a new home before selling your current one. By taking out a bridge loan, you can close the deal on your new house without waiting for your current home’s sale to go through. Learn how bridge loans work, including what they cost and the pros and cons, before deciding if this loan type is right for you.

Key takeaways

• A bridge loan — also known as a swing loan or gap financing — is a short-term loan that typically must be repaid within six months to a year.
• If you need to buy a house quickly, a bridge loan can provide the funds for your purchase while you wait for your current home to sell.
• You’ll typically need at least 20% equity in your current home to qualify for a bridge loan.

How does a bridge loan work?

A bridge loan is a short-term, temporary financing solution designed to help cover, or bridge, the gap between immediate funding needs and longer-term, permanent financing, such as a traditional mortgage.

You may consider using a bridge loan if you’re:

• Buying a new home before selling your current one: Maybe you can’t afford to buy a new home without selling your current house first, or you need to secure a new home quickly for a job opportunity or changing family circumstances.
• Buying a home in a competitive market: When there are multiple bidders for a home, sellers can afford to be picky — and they may prioritize buyers who don’t make offers that are contingent on a home sale.
• Buying a fix-and-flip house: A bridge mortgage is worth considering if you’re pursuing a fixer-upper purchase. If everything goes according to plan, you can repay the loan once renovations are complete and you sell the home. You may be able to obtain a bridge loan faster than traditional financing, allowing you to snap up a new property quickly.

Repayment options on a bridge loan vary by lender — some require monthly payments, while others allow you to defer payments until your property sells.

How much does a bridge loan cost?

Bridge loan closing costs and fees can run from 1% to 3% of the loan amount. For example, if you get a $200,000 bridge loan, you could pay between $2,000 and $6,000 in closing costs and fees. Additionally, bridge loan rates typically range from 6% to 12%, and can vary depending on your loan-to-value (LTV) ratio, loan amount and credit score.

Bridge loan example

Let’s say you’re buying a new home for $400,000. Your current home is worth $350,000 and you still owe $150,000 on it. A bridge loan company offers financing for up to 80% of your current home’s value, either as a first mortgage or second mortgage. Here’s how the math works in these two situations:

Bottom line: In the example above, a bridge loan converts your $130,000 home equity into cash you can use to purchase your new home while waiting to sell your current home.

Even though the cash amount is the same in each example, the key difference is how many mortgage payments you’ll make. A first-mortgage bridge loan pays off your existing mortgage, leaving you with just your bridge loan payment. A second-mortgage bridge loan leaves the balance on the existing mortgage intact but adds a second lien, which means you’ll make two monthly payments until your existing mortgage is paid off.

Bridge loan requirements

Before applying for a bridge loan, check how you measure up against the following key requirements.

Home equity

Most lenders require at least 20% equity in your current home to get a bridge loan. While 20% is the general rule, some lenders may accept as little as 15% equity.

Debt-to-income (DTI) ratio

Bridge loan lenders want to ensure you can afford payments on both your current and new homes. They’ll check your DTI ratio to determine how your monthly debt payments stack up against your monthly income. If your DTI ratio is above 50%, you may have trouble qualifying for a bridge loan.

Credit score

Lenders will check your credit score to see how well you manage debt. Credit score requirements vary by lender, but borrowers with higher credit scores typically get the best rates.

  Don’t know your credit score? Get your free score on LendingTree Spring today.

How do you get a bridge loan?

Bridge loans are a specialized product, and not all lenders offer them. Start by asking the lender handling your new home purchase whether it offers bridge loans. If it doesn’t, consider these options:

• Local banks and credit unions. If you already have an account with a local institution, ask about bridge loans. Even if you don’t, local banks and credit unions offer personalized service and understand the local real estate market.
• Non-QM lenders. Non-qualified mortgage (non-QM) lenders specialize in alternative mortgage products like bridge loans. Non-QM loans may include features not allowed in qualified mortgages, like interest-only or balloon payments.
• Hard-money lenders. Hard-money lenders are individuals or groups of investors who offer loans with short repayment terms, like bridge loans. They tend to charge higher interest rates, but they may not be as stringent regarding credit requirements. Always verify the lender’s reputation before proceeding.

Pros and cons of bridge loans

Pros

 You can buy a new home before selling your current one: Selling a home can take time. If you find your perfect home and want to move quickly, a bridge loan can provide the quick funding you need.

 You won’t need a sale contingency: Sellers may prefer offers without a sale contingency, especially in competitive markets.

 You won’t need to dip into savings: Since a bridge loan provides the cash you need, you won’t need to use your personal savings for a down payment on the new property.

 You may have flexible repayment options: Some bridge loan lenders offer different ways to repay the loan, such as interest-only payments or deferred payments until you sell your house.

 You can avoid private mortgage insurance (PMI): If you can use a bridge loan to make a 20% down payment on your new home, you won’t need to pay PMI charges.

Cons

 You may pay a higher interest rate: Due to their short-term, high-risk nature, bridge loans tend to have higher interest rates than conventional mortgage loans.

 You’ll need to pay closing costs: Closing costs on a bridge loan may include home appraisal and origination fees, which can total up to 3% of the loan amount.

 You’ll have to manage multiple payments: Since you’ll own two houses at once, managing two mortgage payments, even temporarily, can be challenging.

 You’ll need at least 20% home equity: Many bridge loan lenders require borrowers to have a minimum of 20% equity in their current home.

 Your mortgage options may be limited: Some bridge loan companies only offer bridge loans to borrowers who also get a purchase mortgage through them, which can limit your ability to shop around for a loan for your new home.

Beware: You won’t have the same legal protections as with a traditional mortgage

Unlike standard mortgage loans, bridge loans generally aren’t covered by the Real Estate Settlement Procedures Act (RESPA), which sets standards for informing consumers about settlement costs and how lenders are paid. Make sure you shop around for the best bridge loan terms — they may vary significantly from lender to lender.

Should you get a bridge loan?

If you need to move on short notice or find your dream home before your current home sells, a bridge loan can provide a short-term solution — though it often comes at a higher cost. Bridge loan rates tend to be higher than conventional loan interest rates, and there are also closing costs to consider. While bridge loans can help you act quickly in a competitive real estate market, it’s important to weigh all of your options, including alternatives, before making a decision.

Bridge loan alternatives

Home equity line of credit (HELOC)

A HELOC works like a credit card — you can make purchases up to a certain limit, pay down your balance and reuse your credit line as needed. HELOCs typically have lower interest rates and lower closing costs than bridge loans, and they offer more time for repayment.

Browse current HELOC rates.

Home equity loan

With a home equity loan, you borrow against a portion of your home’s equity and receive the funds as a lump sum, which you start repaying right away. If you want the predictability of a fixed interest rate and monthly payment, a home equity loan may be a better choice than a HELOC.

Learn more about how much you could borrow using a home equity loan calculator.

80-10-10 (piggyback) loan

Instead of taking out a home equity loan or HELOC on your current home, you take out two loans on your new home with an 80-10-10 piggyback loan — one for 80% of the home’s value and another for 10% — and make a 10% down payment. When your current home sells, you can pay off the 10% second loan. You’ll be left with only one mortgage payment if you make enough profit from your home sale.