Bridging the gap: bridge loans & bridge loan alternatives

You just accepted your dream job offer and plan to move across the country for it within the next several weeks. So, you listed your home for sale and started looking for a house to buy in your new state.‍

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Within a week, you found a property you love. Unfortunately, you need the proceeds from selling your current home to afford the downpayment. Your old house isn’t even under contract yet.

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You start to panic. You committed to being in your new employer’s office in five weeks. Now, you’re down to four.

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Take a deep breath. There’s a financial product designed to help you get through this nerve-wracking (but common) situation: the bridge loan.

How do bridge loans work?

A bridge loan is a type of short-term financing that's generally used to facilitate a real estate purchase. Also called gap financing, interim financing, or a swing loan, a bridge loan can help you buy your new home before your current property sells.

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Bridge loan terms range from six months to three years but generally end within 12 months. The loan can be a small second mortgage on your current home, giving you enough funds for a down payment. Alternatively, you can take out a large enough bridge loan to pay off your first mortgage and cover your down payment.

What can you use a bridge loan for?

A bridge loan can be the right financial tool in other situations besides bridging the gap between buying and selling a property. Here are a few other potential use cases:

• Fast home purchase: You don’t need to sell your current house for a bridge loan to make sense. You could use it to tap your home equity (the value of your residence, minus what you owe on your mortgage) for a down payment on a second or vacation property. However, if you go this route, be sure your finances can accommodate the loan payments.
• Renovation costs: You can use funds from a bridge loan to help you repair or update your home before you list it on the market. You could also use the loan to cover the renovation costs on a fixer-upper property you purchase.
• Real estate investment: A bridge loan can help you purchase a house you intend to fix and flip. It could also help you make a down payment on a rental property.

Bridge loan requirements

Lenders typically offer bridge loans to borrowers with a strong credit history and sufficient equity in their current homes. A borrower generally needs a credit score of 680 or higher, 20% or more of owned equity, and a debt-to-income (DTI) ratio of 50% or lower. Additionally, some lenders may require proof of income and a clear exit strategy, such as a pending sale or other plans to repay the loan.  

The pros and cons of bridge loans

Pros of bridge loans

Bridge loans have several advantages and benefits. Here are three of the most significant:

• Short-term debt: Many standard mortgage terms run for decades, making it feel like you’re in debt forever. However, you’ll repay your bridge loan in less than three years. If you sell your home quickly, you may only have the loan for a few months.
• Fast financing: While every situation is different, you can generally get a bridge loan fast. You could get the funds you need in as little as a few days. (However, the loan may take two to four weeks to close).
• Repayment flexibility: Typically, you’ll use the cash you get from your home sale to repay your bridge loan. Some lenders will require monthly payments throughout the life of the loan, while others will defer payments until your home sale deal closes. Your lender could also require interest-only payments until your property sells.

Bonus perk: A bridge loan can help you make a competitive, non-home sale contingent offer on a property in a hot real estate market.

Cons of bridge loans

On the other hand, bridge loans do have some potential pitfalls. Here are the top three downsides:

• Higher borrowing cost: Lenders typically charge higher interest rates for short-term loans to maximize their revenue. Therefore, bridge loan rates are roughly two percent higher than regular mortgage rates. You’ll also have to cover loan origination fees, closing costs, and potential home appraisal fees.
• Requirements: Qualifying for a bridge loan is similar to qualifying for a standard mortgage. If you have a low credit score, low income, or low equity, you will likely have trouble securing a bridge loan. It's also worth noting that you’ll likely need to get your bridge loan from the same lender financing your new home.
• Risks: Your current property is collateral for your bridge loan, so you could face foreclosure if you default. Therefore, you must ensure your budget can absorb the required payments before taking out the loan. Keep in mind that you may have to juggle multiple mortgage payments simultaneously if it takes a while for your old home to sell.

Alternatives to bridge loans

While a bridge loan can be the right solution in some circumstances, you have other options. Here are a few alternatives to bridge financing worth consideration:

Home equity loan

Why it’s worth exploring: Access to a lump sum; predictable monthly payments

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A home equity loan lets you borrow against your home’s equity. You could use the proceeds from the loan as a down payment on another property or to cover renovation expenses.

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If eligible, you’ll receive your funds as a lump sum. Home equity loans generally feature a low, fixed interest rate, so your monthly payment will stay stable over the life of the debt. You’ll also have up to 30 years to pay it off.

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However, you generally need good credit (credit score of 680+) and a low debt-to-income ratio (under 43%) to qualify. You must also have sufficient equity (20%+) in your home and be able to cover closing costs (up to five percent).

Home equity investment

Why it’s worth exploring: Access to a lump sum; no monthly payments

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A home equity investment (HEI) is another way to tap into your home equity; it provides a lump sum in exchange for a portion of your property’s future appreciation. You can use the funds to pay for your next home purchase or renovation project.

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‍With an HEI, you retain ownership of the property. Unlike a traditional loan, there are no monthly payments. ‍You can buy back your equity anytime during a 30-year term when you sell the property or refinance it.

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An HEI is also much easier to qualify for than other home equity-related financial products. If your credit score is 500 or better, you live in a zip code where the product is offered, and you have sufficient equity in your property, an HEI may be a viable option for you.

Home equity line of credit (HELOC)

Why it’s worth exploring: Flexible line of credit; long-term financing

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A home equity line of credit (HELOC) lets you borrow against your property's equity and functions like a credit card. If approved, you'll receive a line of credit to cover your down payment, closing costs, or other real estate-related expenses.

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Eligibility requirements are similar to home equity loans but have variable interest rates and repayment terms. During the ten-year draw phase, you can borrow, repay, and borrow again, making interest-only payments. In the 20-year repayment phase, the credit line closes, and you must make full principal and interest payments until the debt is repaid

Cash-out refinance

Why it’s worth exploring: Could potentially lower your monthly mortgage payments

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With a cash-out refinance, you take out a new mortgage that’s large enough to pay off your original loan and cover the down payment on your new home. Generally, you can borrow up to 80% of your property’s value.

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Qualification requirements for a cash-out refinance are often more lenient than for a home equity loan or HELOC. You could get approved for the new mortgage with a credit score as low as 580.

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Pro tip: You can’t tap into your home equity via a home equity loan, HELOC, or cash-out refinance if your property is listed for sale. You can with a bridge loan.

DSCR loan

Why it’s worth exploring: Not based on an existing property's equity

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If you're a real estate investor looking to finance an investment property, a DSCR loan may be worth exploring. A Debt Service Coverage Ratio (DSCR) is a type of loan that allows borrowers to qualify for a mortgage based on the cash flow of the property rather than their personal income or equity. The primary requirement for a DSCR loan is that the property's net operating income must exceed the debt payments, typically by a ratio of at least 1.25.

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Lenders also consider the property's value, location, and the borrower's credit score, though the focus remains on the property's ability to generate sufficient income to cover the loan.

Seller financing

Why it’s worth exploring: Could help you bypass traditional underwriting

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If you want to avoid getting a mortgage through a bank, seller financing could make sense. With seller financing, you pay the homeowner directly in installments for a set period, usually five to 10 years. Then, you make a balloon payment at the end of the repayment term to cover the remaining balance.

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Generally, you can close faster on a seller financing deal than a traditional mortgage, which can help you if you need housing urgently. However, you may have to pay a higher interest rate and make a larger down payment.

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In addition, the flexibility of the arrangement comes at a cost. Seller financing deals are subject to fewer regulations than regular mortgages, so entering into one can be risky. Be sure to have your contract carefully reviewed by a real estate attorney.

Final thoughts

If you need to close on a new home but can't wait until the sale of your current home is finalized, an HEI might be the right solution for you. We’re here to help you understand your options, so contact us today or get prequalified for a Point HEI.

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