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Bridge loans can help you finance the down payment for a new home when you haven’t sold your current home yet and don’t have enough cash.
With a bridge loan, you won’t have to make a purchase offer contingent on selling your home. You’ll also avoid having to sell, move, buy, then move again. However, these conveniences come at a cost.
Here’s what you need to know about bridge loans:
- What is a bridge loan?
- How to use a bridge loan
- Qualifying for a bridge loan
- Pros and cons of bridge loans
- Should you get a bridge loan?
- Alternatives to bridge loans
What is a bridge loan?
A bridge loan, sometimes called a swing loan or interim financing, helps you secure short-term financing to purchase a new home while you wait for your current home to sell.
Bridge loans give you more flexibility when shopping for a new home. If you qualify for the loan, you won’t have to sell your current home before you can buy your next home.
After securing a bridge loan, you’ll make interest-only payments for a short period of time — usually six to 12 months, though it’ll depend on your lender — then repay all the principal when you sell your home or at the end of your loan term.
With some lenders, you might be able to borrow as much as 90%. Closing costs are similar to those for other home loans.
How to use a bridge loan
There are two common ways to structure a bridge loan:
To pay off your current mortgage
Let’s say your current home is worth $400,000 and your mortgage balance is $80,000. Like a home equity loan, you’ll need to retain 20% equity in the home when you get a bridge loan.
In this example, you could borrow up to $320,000, which you can use to pay off your $80,000 mortgage. That’ll leave you with $240,000 to put toward the down payment of your next home, minus a few thousand for the closing costs of your bridge loan.
As a second mortgage
Again, let’s say your current home is worth $400,000, your mortgage balance is $80,000, and you secure a bridge loan for 80% of your home’s value ($320,000).
You continue to pay your $80,000 mortgage, but now you have $320,000 to put toward your next home, minus closing costs.
If you’re downsizing, the bridge loan might be enough to cover the cost of your new home outright.
Qualifying for a bridge loan
Compared to qualifying for a first mortgage on a primary residence, it can be tricky to qualify for a bridge loan.
Unless your current home is already in escrow, you’ll need to show the lender that you can pay for the mortgage on your existing home, the mortgage on your new home, and the bridge loan.
That means you’ll need a lot of income to manage all that debt, as well as a good credit score.
Unlike a conventional loan or government-backed mortgage, however, there aren’t detailed guidelines lenders must follow to determine who qualifies for a bridge loan and who doesn’t. It’s up to the lender to decide.
Find Out: How Your Debt to Income Ratio Can Affect Your Mortgage
Pros and cons of bridge loans
Bridge loans give homeowners more options when they’re ready to move. But they aren’t as easy to find as other home loans.
Pros
- They allow you to make an offer without a sale contingency. In a seller’s market, you might be competing with other buyers for the same home. If you can offer a faster closing — one that isn’t contingent on you selling your home first — sellers will be more likely to accept your offer.
- They prevent you from having to move twice. Packing and moving means major upheaval in your life. It also costs money, from lost work time and moving expenses to rental deposits and storage fees.
- They can help you avoid PMI. The money from a bridge loan can allow you to put 20% down on your next home. That means you won’t have to pay for private mortgage insurance.
- They give you more time to find the right home. If you want to sell your current home first to get the cash for your next home — but you don’t want to move twice — your options will be limited to whatever’s on the market in the short window before the new buyer wants to move in.
Cons
- They’re not a last-minute solution. Some lenders can close in a week or two. Others require a more traditional 30 to 45 days. If you think you might want to use a bridge loan, arrange your financing in advance.
- Interest rates on bridge loans can be high. You might be able to get a low interest rate, similar to one on a conventional mortgage. But rates for bridge loans can also be very high, with some exceeding 9% at certain lenders.
- They can be harder to qualify for. You’ll need to show that you can make an additional monthly payment on top of your existing obligations and your new mortgage.
- You could risk foreclosure. Since your home is the collateral for a bridge loan, you could lose your home to foreclosure if you become unable to repay it. However, you might be able to renew your bridge loan, at an additional cost, if your home hasn’t sold by the end of the loan term.
Learn More: What Is a Mortgage Rate and How Do They Work?
Should you get a bridge loan?
Anyone who has strong finances and wants the flexibility to buy their next home before selling their current one is a candidate for a bridge loan.
If you need to quickly relocate or you want to renovate your new home while living in your old one, you might also benefit from a bridge loan.
Some bridge lenders even require you to get the mortgage for your new home from them.
While Credible doesn’t offer bridge loans, you can use our platform to compare prequalified mortgage rates from our partner lenders. It’s free and only takes a few minutes.
Alternatives to bridge loans
Since bridge loans can be expensive and hard to qualify for — not to mention harder to find, as they’re a specialty product — you might want to consider other options for funding a down payment.
Home equity line of credit
Best if: You want to keep interest costs down
A home equity line of credit can have lower closing costs than a bridge loan, and you’ll only pay interest on the amount you need to borrow. Plus, HELOCs only require principal payments during the first few years.
You’re unlikely to be approved for one once your home is listed for sale, so this strategy requires advance planning. Some lenders specifically prohibit using a HELOC as a bridge loan.
Piggyback loan
Best if: You have enough cash to put 10% down on your new home
A piggyback loan, or 80/10/10 loan, is a type of second mortgage that can cover 10% of the purchase price on your new home. Combined with a 10% down payment, you’ll only need to borrow 80% of the purchase price on your primary mortgage, which lets you avoid PMI.
If you want, you can pay off this loan when your current home sells. A piggyback loan usually has a higher rate than a first mortgage.
Personal loan
Best if: You want to minimize fees
Personal loans are unsecured, so they usually have higher interest rates than mortgages, and you might not be able to borrow as much.
Since you’ll have to pay both principal and interest, the monthly payment on a personal loan could also be higher than with a bridge loan or HELOC.
However, personal loans don’t come with all of the closing costs that mortgages or bridge loans do. Underwriting tends to be fast as well, and the repayment period will usually be several years.
Keep Reading: Home Equity Loan vs. Personal Loan: Which Is Right for You?
Home trade-in
Best if: You want to minimize borrowing — and showing your home
Several companies exist that will buy your home, then give you ample time to find a new place before you have to move.
You might pay a convenience fee or earn less than market value if you sell your home this way, and the service might not be available in your area.
Credible doesn’t currently offer bridge loans, but we can help you compare mortgage rates from multiple lenders — you can see your prequalified rates from our partner lenders in the table below.
