At a Glance

If you need short-term financing for a down payment on a new home while you wait for your current home to sell, or if you want to make an offer without it being conditional on your home selling first, a bridge loan can come in handy. These short-term ‘gap’ loans can be helpful when you need quick cash flow during a real estate transaction. However, as with any form of financing, bridge loans have pros and cons. Read on to learn more.

In this article, you’ll learn:

What is a bridge loan?

A bridge loan, also called a “swing loan” or “gap loan,” is a loan designed to provide financing during a transitional period, such as between selling your current home and buying a new one. This short-term mortgage is secured by a portion of the equity in your current home (even if it’s for sale) and used toward the down payment as a new home. 

Home equity is the difference between your home’s value and the balance of your mortgage.

Essentially, bridge loans help with the balance of buying and selling a house at the same time, allowing you to put a down payment on a new home before you can sell your existing home. It can help with the expense of managing the mortgages of two properties at the same time and is often relied on when flipping properties. 

How do bridge loans work?

Because these loans are typically only used in specific situations, the structure, cost, and conditions of bridge loans can vary widely. For example, a bridge loan may use both homes as collateral, or it may involve cashing out equity from your current home and using that as a down payment for a new property. Some have monthly or interest-only payments while others require upfront or end-of-term lump-sum interest payments. 

However, there are a few common characteristics:

  • Terms typically range from 6- or 12-months. 
  • Loans are secured by the borrower’s home. 
  • The borrower must usually agree to finance the new mortgage through the same financial institution. 
  • Loan amounts can range from several hundred thousand dollars to over $1 million. 

With bridge loans rates can vary, anywhere from the prime rate to the prime rate plus two percentage points. 

1. Application process

The application process for a bridge loan is about the same as a regular mortgage, but there are a few differences to note: 

  • Check your home equity. You’ll need at least 15-20% equity to get a bridge loan, and you’ll need even more than that if you need extra cash for a down payment for a new home.
  • Know your debt-to-income ratio. You’ll need to qualify with both the payments in your current home and the home you’re buying. If you have varying or unstable income, paying several mortgage payments can quickly drain your savings.
  • Improve your credit. While you’ll find bridge loan lenders that accept lower credit scores from borrowers, a high score will get you a lower rate.
  • Compare lenders. Bridge loans are a specialized product so not all lenders offer them. Talk to local banks and credit unions, non-qualified mortgage (non-QM) lenders who specialize in alternative loan products, and hard-money lenders who offer loans with short repayment terms. Make sure the lender is reputable before working with one.

Once you find a lender, you’ll apply. Note that you will qualify for a bridge loan based on your:

  • Credit score
  • Income
  • Assets
  • Appraisal of your current home (to confirm its value)

Also, know that closing costs and fees can be expensive, so confirm how much you’ll owe to your lender ahead of time. 

2. Requirements

Credit score

Bridge loan lenders have more underwriting flexibility than mortgage lenders, so you may be able to get a bridge loan with a credit score as low as 500. However, most lenders require scores in the high 600s to qualify. 

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DTI ratio

Experts recommend keeping your debt-to-income (DTI) ratio, which is all your monthly debt payments divided by your gross monthly income, below 36%. However, due to more underwriting flexibility, some lenders allow a DTI ratio as high as 50%. 

Equity

You’ll need at least some equity in your current home to take out a bridge loan. Many lenders require at least 15%, while others may require 20%. 

3. Example

For example, say you need a bridge loan of $100,000. Your current home is worth $250,000 and you have a $75,000 balance left on your mortgage. Of that $100,000, $75,000 would go toward the mortgage, and another $3,000 would go toward closing costs. With the bridge loan, you now have $22,000 for your next purchase (as long as the sale of your current home goes through). 

Another example is that you buy a home for $350,000. Your current home is worth $300,000. You owe $100,000 on your current mortgage. The bridge loan company lends you 75% of your home’s value as a new first mortgage that replaces your current mortgage to give you cash back. Or, they may offer you the loan as a second mortgage that’s added to your first one, and you’ll get cash back. 

In this case, the bridge loan would be $225,000. After paying the $100,000 you currently owe, you’d get $125,000 cash back for your new purchase. That $125,000 is converted home equity that you can use while you wait for your current home to sell. 

Pros and cons of a bridge loan

Pros

  • Can help cover the financing gap between selling an old home and buying a new one. 
  • Loan amount up to $1 million or more. 
  • Closing on a bridge loan can happen as fast as two weeks. 
  • Can defer payments until the current home sells, or make interest-only payments. 
  • No contingency is needed on your new home purchase. 
  • May be able to make a larger down payment on the home you’re buying. 

Cons

  • Typically do not offer protections for the loan holder (For example, if the borrower has trouble selling the current home or the loan extensions expire, the lender can foreclose on the property.) 
  • Short-term (ranging up to 12 months). 
  • Closing costs and fees. 
  • Must have 15-20% equity in the current home. 
  • May have to use the same lender for a bridge loan and a new home mortgage. 
  • Typically have higher interest rates and APRs. 

Why take out a bridge loan?

You may need a bridge loan for a few reasons, such as if you are buying:

  • A new home in a highly competitive market: When a home has multiple offers, a seller is less likely to accept an offer that’s contingent on the sale of a home since it makes financing riskier. However, a bridge loan can help you get enough cash to bridge the gap between your current home and new home payment until your home sells.
  • A fix-and-flip home: If you’re buying a home to fix up, flip, and re-sell, you may want to consider a bridge loan because the fast financing will allow you to get the property quickly. You can repay the loan when renovations are complete.
  • A fixer-upper: If your new property needs significant repairs but they don’t meet traditional loan guidelines, a bridge loan may give you the money you need to complete the extra renovations without having to tap into savings. 

Other reasons to consider a bridge loan include:

  • If you found a new home but the seller won’t accept a contingency offer to sell your current home. 
  • Your closing date for your current home is after your settlement for your new one. 
  • You can’t come up with a down payment for a new purchase unless you sell your current home. 

Alternatives to a bridge loan

1. Personal loan

If you have good to excellent credit, you may qualify for a personal loan. While you typically can’t use a personal loan toward a down payment on a home, you can use it to purchase your new home completely in certain situations. For example, if you’re buying a tiny home or a low-cost fixer-upper. You may also be able to pay off your current mortgage with a personal loan, though personal loans often have higher interest rates than mortgages so you’ll end up paying more over time. 

Personal loans can also be used for debt consolidation, home renovations, and more. Rates depend on your creditworthiness, and loan amounts and terms depend on additional factors like your income and DTI ratio. 

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2. Home equity loan 

A home equity loan (HEL) also requires equity in your home. You will borrow against a portion of your home’s equity and receive the funds as a lump sum which you can use as a down payment. You’ll begin repaying the loan plus interest right away in fixed monthly payments. 

3. Home equity line of credit

A home equity line of credit (HELOC) works similar to a credit card. You will get a credit line limit based on the equity you have in your current home (and other factors). If you’re approved, you can borrow as much as you need up to your credit line’s limit. You’ll then repay what you borrowed plus interest. The downside is that you’ll be using your current home as collateral so you could lose your home if you’re not able to repay the HELOC. 

4. 80-10-10 loan

Instead of taking out a HEL or HELOC on your current home, you can take out two loans on your new home – one for 80% of your home’s value and the other for 10%, and make a 10% down payment. When your current home sells, you pay off the 10% second loan, and you’re only left with the mortgage payment. However, you must make enough profit from your current home sale for this to work. 

Bridge loan vs. traditional loans

When it comes to bridge loans, there are a few common differences compared to a traditional loan:

  • You must choose whether the loan is a first or second mortgage. If you choose a first-mortgage bridge loan, the lender will offer you one loan to pay off the balance of your current mortgage plus enough for a new down payment. Once the current mortgage is paid off, the bridge loan takes the first position until you sell your current home, and then you’ll pay off the loan.
    As a second mortgage, the lender would offer you a loan in the amount you need for a down payment on the new home but would leave the current mortgage balance alone. The loan is secured by your current home.
  • You can typically borrow up to 75% of your home’s value. You can’t tap into all of your current home’s equity, but you will need at least 15-20% and can usually borrow up to 75%.
  • Monthly payments are more flexible. This depends on the lender’s terms, but for example, you may be able to make interest-only monthly payments, fixed monthly payments, or no payments until your home is sold.
  • Closing costs and prepayment penalties can be expensive. Expect to pay up to 3% of the loan in closing costs. Rates can also be as high as 8% or more depending on the loan amount and your credit. Many bridge loans also have a prepayment penalty, so read the terms and conditions before completely paying it off.
  • Loan terms are shorter. A bridge loan’s term typically ranges from 6-12 months (unlike a traditional mortgage that is either 15 or 30 years). Make sure you’ll be able to sell your current home within that time.
  • Borrowers don’t get the same legal protections. For example, bridge loans aren’t covered by the Real Estate Settlement Procedures Act (RESPA) which sets standards for informing customers about settlement costs and how lenders are paid. 

FAQs

Some lenders may be willing to work with borrowers with a credit score as low as 500, though typically they require scores in the mid-to-high 600s.

First, you must have at least 15-20% equity in your current home (depending on the lender). The lender will also check your credit score, income, and DTI ratio.

Bridge loans are typically easier to get than traditional mortgages, and you can close on them much faster (even in as little as two weeks). However, you won’t qualify if you don’t have enough equity in your current home.

There are a few ways you can repay a bridge loan depending on the lender’s requirements. For example, you may make interest-only monthly payments. Or, you may have fixed monthly payments. The lender may allow you to defer payments until your current home sells. Check with the lender to learn more.

Most lenders require a DTI ratio below 36%, though some lenders may accept applications for borrowers with a ratio of up to 50%.