How does a bridge loan work?
A bridge loan works by using the equity in your existing property to provide you the cash needed to purchase a new one.
What Is a bridge loan in real estate?
A bridge loan does exactly what it sounds like—it bridges the gap between buying a new home and selling your current one. It provides you the money you need to move forward with a purchase, even if your current home hasn’t sold yet. A bridge loan is perfect for transitional moments when timing is everything.
A bridge loan is perfect for transitional moments when timing is everything.
How it works for homebuyers
Say that house you’ve been eyeing finally comes on the market, but you haven’t sold your existing property yet. A sell-to-buy loan can help cover the down payment on a new home and pay off the mortgage on your current one. Once your old home sells, you use the proceeds to pay off the current loan.
Typical terms and loan amounts
Bridge loans usually last from 6 to 12 months, though some can stretch up to three years. Loan amounts can range from tens of thousands to over $1 million, depending on your equity and financing needs.
When should you use a bridge loan?
A bridge loan is especially useful when you’re ready to buy a new home but haven’t sold your current one yet. By getting cash upfront when your dream home hits the market, you get the flexibility to move forward without waiting for the sale on your older property to close.
In competitive real estate markets
In fast-moving real estate markets where multiple offers are common, a transition loan can give you a serious edge. With immediate access to funds, you can make a strong, non-contingent offer when you find the perfect piece of real estate. That added flexibility can make your offer stand out to sellers and boost your chances of landing the property you want.
When you have substantial home equity
If you’ve built up significant equity in your current home, a bridge loan could be a smart move. That equity serves as collateral, giving you access to the funds needed to make a down payment on your next property. It’s especially useful when you’re on a tight timeline and can’t afford to wait for your current home to sell before making your next move.
Pros and cons of bridge loans
Bridge loans offer speed and flexibility when you need to move quickly—but like any financial tool, they come with both advantages and trade-offs worth considering.
| Pros | Cons |
|---|---|
| Quick access to funds | Higher interest rates |
| No home-sale contingency | Two mortgage payments temporarily |
| Flexible payment structure | Risk if current home doesn’t sell on time |
How to minimize the downsides
- Boost your credit: A higher score can unlock better rates and bigger loan amounts.
- Lower your debt load: Reducing your debt-to-income ratio makes you a stronger borrower.
- Plan your exit: Know exactly how you’ll repay, whether it be through a home sale, long-term financing or another method.
- Keep a cash buffer: A cash reserve helps cover costs if you’re juggling two mortgages temporarily.
Bridge loan rates and alternatives
When considering a bridge loan, it’s important to understand the costs involved. Bridge loan rates are typically higher than traditional mortgage rates because of the short-term nature and added risk for lenders. These rates can vary depending on the lender, your credit profile and the amount of equity you have in your current home. If you're exploring different financing options, bridge finance loans may offer flexibility in navigating time-sensitive transactions, but always compare terms and conditions carefully.
Bridge loan vs other financing options
Before committing to gap financing, compare it with other options to see what fits your financial situation best. To help, we’ve lined up a quick comparison with two popular alternatives: HELOCs and home equity loans.
Bridge loan vs. HELOC
| Feature | Bridge Loan | HELOC |
|---|---|---|
| Term | Typically 6–12 months (but can run longer) | Typically up to 10 years (but can run up to 30 years) |
| Interest Rate | Fixed or variable | Variable |
| Use Case | You want to buy a home before selling your current one | You want to renovate and have recurring access to funds |
| Repayment | Balloon at sale | Monthly minimums |
| Speed to Funding | Fast | Medium |
Bridge loan vs. home equity loan
| Feature | Bridge Loan | Home Equity Loan |
|---|---|---|
| Term | 6–12 months (but can run longer) | 5–10 years (but can run up to 30 years) |
| Interest Rate | Fixed or variable | Fixed |
| Use Case | You want to buy a home before selling your current one | You want to fund a one-time large expense |
| Repayment | Balloon at sale | Monthly fixed |
| Speed to Funding | Fast | Medium |
How to qualify for a bridge loan
Qualifying for a bridge loan comes down to a few key factors. Before diving in, make sure you understand what lenders look for.
Home equity requirements
Equity is based on the home’s market value minus your mortgage balance. To qualify for a bridge loan, you’ll need substantial equity in your current home—usually 15% to –25% of its value. Meeting this requirement is critical to both eligibility and determining how much you can borrow.
Income and debt considerations
To qualify for a bridge loan, lenders take a close look at your debt-to-income (DTI) ratio. Generally, your DTI should be no more than 50% of your gross monthly income. That means all your monthly debt payments—including the bridge loan—should stay within half of what you earn before taxes. They’ll also review your credit, job history and other financial obligations to gauge your ability to repay.
Timeline and repayment planning
Bridge loans are typically faster to secure than traditional loans, with funding often available in just a few days to a couple of weeks. Terms usually run from 6 to 12 months, with some requiring interest-only payments—or none at all—until a lump sum is due at the end. Plan your repayment so the sale of your current home covers the payoff. Timing and structure are key to avoiding added stress.
PRO TIP
Buying a fixer-upper? A bridge loan can help you secure the property first, then refinance into a renovation loan once your current home sells.
