How does a bridge loan work?

When buying a new home and selling your old one, often the two transactions don’t happen simultaneously. Many homebuyers in this situation turn to a bridge loan until they can get the cash out of their old home. Bridge loans are time-sensitive loans that provide interim financing until you can put permanent financing in place. Learn how does a bridge loan work, who offers bridge loans, and how to get a bridge loan.

How does a bridge loan work?

A bridge loan offers temporary financing so you can purchase a property now while waiting for another transaction to close. Bridge loans work by paying off your first mortgage with cash out for a down payment on the new home, or by acting as a home equity loan to access cash until your home sells.

These short-term loans are secured by your home's equity and are typically paid off within six months to a year, but may last as long as three years. Interest rates tend to be higher than those of conventional mortgages due to the short-term nature of the loans and the risk of being a second-position lien on the home in case of default.

Here are a few of the scenarios where getting a bridge loan makes sense:

• Need cash for a down payment on a new home before the current home sells
• Must quickly buy another home to relocate for a new job
• The closing of your existing home is after the close date on your new one
• You want to buy a new home and move in before listing your current property
• A seller's market makes contingent offers unappealing

Requirements

Qualifying for a bridge loan is much like applying for any other mortgage. The lender reviews your credit score and history, the value of the home, your equity, and debt-to-income (DTI) ratios. You must have enough equity in your home to pull cash out without going above the lender's maximum loan-to-value (LTV) limits.

Term length

Bridge loans are time-sensitive loans that are typically repaid within 12 months. However, some lenders may allow for terms of up to three years. If your home does not sell before the loan term expires, the lender may require you to refinance the loan or offer an extension of the current terms. Since the loan is a short-term financing option, lenders often charge an additional fee when borrowers request to extend the repayment date.

Repayment

Monthly payment varies by loan amounts, the lender used, and the type of bridge loan you apply for. Borrowers may have a traditional payment that combines principal and interest, or they can keep expenses lower by selecting an interest-only loan or a balloon payment. Many homeowners choose the interest-only payments or the balloon-payment option because it can be challenging to juggle payments on two properties at once. The balloon payment option accrues interest monthly, but does not require payments until the property sells or the loan term expires.

How to get a bridge loan

Bridge loans are not offered by every lender. Contact your existing bank to see whether they offer bridge loans or can provide a referral to one that does. You can also contact mortgage brokers and hard money lenders to compare bridge loan rates and terms. Getting a bridge loan involves a few key steps:

• Check your eligibility. Lenders typically look at your credit score, income, debt-to-income ratio, and the equity in your current home. Strong financials make approval easier and may help you secure better terms.
• Determine how much you need. Calculate the gap between your current home sale and your new home purchase, including down payments, closing costs, and any moving expenses. This helps you request the right loan amount.
• Compare lenders and terms. Bridge loans can vary in interest rates, fees, and repayment structures. Shop around and review options carefully to find a plan that works for your timeline and budget.
• Prepare documentation. You’ll need proof of income, tax returns, mortgage statements, and information about your current home’s value. Having everything ready speeds up the approval process.
• Close the loan and plan repayment. Once approved, your lender disburses the funds so you can move forward with your home purchase. Make a clear plan for repayment—typically from the proceeds of selling your current home—to avoid carrying two mortgages for longer than necessary.

The process for bridge loans is typically quicker than conventional real estate transactions. However, the lender may still require a limited appraisal, proof of income, and other underwriting basics. Since borrowers often need the money urgently, lenders can approve bridge loans as quickly as 72 hours.

Pros and cons of bridge loans

Alternatives to bridge loans

While bridge loans are an excellent choice for many borrowers, they aren’t the best choice for every situation. Here are a few other ways to get the money you need right away without waiting for your home to sell.

Home equity line of credit

A home equity line of credit (HELOC) is a flexible line of credit secured by your home’s equity. You receive a maximum credit limit, like a credit card, that you can use repeatedly. They are ideal for temporary financing needs because you don’t pay interest until you withdraw money. HELOCs have a variable interest rate, and monthly payments are interest-only based on your outstanding balance.

Home equity loan

A home equity loan offers long-term financing on a lump sum of cash out of your home’s equity. The interest rate and monthly payments are fixed for the life of the loan. Typical repayment periods range from five to 20 years. Many homeowners use home equity loans as a bridge when selling their home because it allows them to tap their equity before the sale closes.

Home equity investment

An alternative way to access your home’s equity—without monthly payments or taking out a traditional loan—is through a home equity investment (HEI). HEIs allow homeowners to cash out up to $600,000 from their home equity in exchange for sharing in the home’s future appreciation. Instead of monthly payments, you'll settle the investment when you sell, refinance, or use another source of funds anytime during a flexible 30-year term.

Homeowners can get approved with less-than-perfect credit and without the normal income verification that comes with other types of home equity financing.

Piggyback loans

A piggyback loan is approved simultaneously as your first mortgage as a way to secure favorable interest rates and terms, while avoiding private mortgage insurance (PMI). Conventional lenders require PMI when a borrower takes out a mortgage greater than 80% of the home's value. Piggyback loans serve as a secondary loan, so homebuyers with smaller down payments can buy a home without paying PMI.

Buying a home with a piggyback loan often includes an 80% first mortgage, a 10% second mortgage, and a 10% down payment. In some cases, the second mortgage is 15%, with a down payment of 5%. The piggyback carries a higher interest rate and may involve paying fees, but the buyer often saves money overall since this allows them to qualify for a lower rate on their primary mortgage. This financing option can eliminate the need for a bridge loan because it requires a smaller down payment than the traditional 20%.

The bottom line

If you're trying to sell your home, you don't have to wait until it sells to buy a new one. You can use a bridge loan to get the money you need today, and then pay it off once the old home sells. Bridge loan interest rates and fees may be higher than conventional mortgages, but they can fund in as little as 72 hours.

Now that you know "how does a bridge loan work," you can use this knowledge to your advantage when searching for homes. When you put in an offer using this strategy, it won't be saddled with contingency requirements that can put your offer at the bottom of the list.