Bridge Loan: When It's Needed, How To Get It

A bridge loan is short-term financing that fills the funding gap that may occur when you buy a new home before selling your current home. With this type of financing, you can avoid losing out on a home you love because of a timing issue with the home you’re selling.

Bridge loans have higher fees and interest rates, and there’s always a risk that your current home doesn’t sell as quickly as you anticipate. Bridge loans often work without a hitch, but if anything falls through you’ll be responsible for paying multiple loans at once.

Bridge loan basics

Say you own your home and plan to move. There are three possible ways to time it.

Sell your home before buying a new one. Any proceeds from selling your house go to your bank account. In many cases, those proceeds become the down payment for a new home. This makes buying a home easy: Lenders love seeing cash in the bank, ready to go. This timeline requires solving one detail: Where will you live if you sell your home before buying another? You could find a short-term rental, negotiate a rent-back agreement when selling, or live with your parents. But you’ll want to have something lined up.
Sell your home and buy a new one at the same time. Sure, it’s not impossible, but it can be tough to line up two major transactions simultaneously. While you’re involved in both transactions, the counterparties are unrelated. The dates the offers are accepted may be too far apart to reasonably close on the same day, and the seller and buyer may have their own closing-date preferences that differ from yours.
Sell your home after buying a new one. Even if you’ve found a mortgage lender, you still need to come up with cash for a down payment and closing costs. Perhaps you have enough saved up elsewhere that you don’t need to wait for your current home to sell. If so, feel free to close this tab. But if the equity in your current home is the key to buying a new home, a bridge loan is often the next best option.

💡TL;DR A bridge loan is a short-term loan that can fund the down payment of a home purchase before you get the proceeds from selling your current home. When you do sell your house, you repay the bridge loan.

How do you qualify?

Have enough equity. Most lenders require you to have at least 20% equity in the home you’re selling.

Have a buyer for your home. Some lenders require you to have a firm sale agreement in place for your home. If you need maximum flexibility, private lenders might be an option to consider, though it may cost more.

Have a good credit score. Borrowers with poor credit may have a hard time getting a bridge loan, even if they can secure a mortgage.

Have an idea of which lender you want to use. It can be convenient to get a bridge loan from the same lender that provides your mortgage, but not every lender offers them.

🤓 Nerdy Tip: If you think you might need a bridge loan, you’ll want to let your mortgage broker or lender know early on in the process. This helps them ask for the right documentation and make the correct calculations.

How much can you borrow with a bridge loan?

The amount of equity you have in your current home is the primary driver of how much you can borrow.

If your home is worth $400,000 and you still owe $300,000, you could get a bridge loan for up to $100,000. But you’ll pay closing costs when you sell, so you can’t count on using 100% of your equity for a new home.

For pricier homes, some lenders may cap the amount you can borrow with a bridge loan.

How long do you have to repay a bridge loan?

A bridge loan can last up to 12 months, but in practice often only lasts a few days or weeks.

If you close on a new home in 25 days, but the sale of your current home won’t close for 45 days, a bridge loan helps facilitate the purchase before the sale, for example.

Unlike a mortgage, you typically don’t repay a bridge loan in set increments. Instead, you pay the interest upfront as a closing cost on the new home, and you pay the balance when you sell your home. Lenders may secure the bridge loan against your current home and, in some cases, your new home. If your bridge loan term is on the longer end, a lender may require periodic payments.

If the sale of your home is delayed or falls through, you’re left holding the bag. You’ll be responsible for paying your new mortgage, the bridge loan and the mortgage on your old home, unless your home is paid off.

What’s the interest rate on a bridge loan?

Bridge loan rates are often based on a lender’s prime rate plus two to five percentage points. If the prime rate is 6.5%, for example, then you might receive a bridge loan offer with a rate between 8.5% and 11.5%.

Here’s what that looks like in dollars: A $100,000 loan with a 10% interest rate that you pay back in 30 days will cost about $800 in interest. In addition to interest, you’ll pay fees to the lender — plan for up to $500.

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