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What is a bridge loan, and how does it work?

Yahoo Personal Finance· Getty Images
Aly J. Yale
·Freelance writer
Updated 6 min read

A bridge loan is a type of mortgage loan for short-term financing. As the name suggests, it “bridges” a gap.

You can use a bridge loan to help finance a home purchase while selling your existing home or investment property. This lightens the financial load and allows you to make more competitive offers. Here’s a look at what bridge loans are, how they work, and how to get one.

In this article:

Learn more: How to make an offer on a house

A bridge loan, sometimes called a swing loan or hard money loan, is a kind of short-term financing for a home. These loans often last for one year, though some lenders offer terms between a few months and three years. Bridge loans are used to cover a gap in financing — usually when two properties are involved.

Bridge loans are often used when a homeowner sells their home and buys a new one simultaneously. You might use one to cover the down payment on the new home or the costs of having two mortgages until your first home sells. You could also use one to pay off your first mortgage while you take out a new one. Investors also often use bridge loans when selling an investment property and buying another.

In a perfect world, you sell your house and use the proceeds to buy your next one. However, timelines aren’t always this simple, so you may need money to help you afford your new home.

With a bridge loan, you’ll apply for the loan, get the funds — often within a few weeks — and use the money to make a down payment on your new property, to cover your new monthly payments (if you’ve already bought a house), or to pay off your old home’s mortgage. You also might want to use one if you’re in a seller’s market, as it would let you waive the sale contingency (which dictates that home buyers must sell their home before a certain date or they cannot buy the new house), making your offer more attractive.

Once your home finally sells, you can use the proceeds to pay off the bridge loan.

Dig deeper: How much does it cost to sell your house?

Bridge loans often come with higher mortgage rates than other home loans because the lender only has a short period to collect on the loan. The exact rate you’ll get on a bridge loan depends on many factors, including your loan amount, the home’s value, your credit score, the property's condition, and other details.

Their terms typically last between a few months and one year. If you have the funds, you can usually pay off the loan early without facing any prepayment penalties.

The biggest advantage of a bridge loan is that it can help you stay competitive when buying a home. You won’t need to include a sale contingency in your contract, and you can cover the down payment and extra mortgage payments until the sale of your current home goes through.

Most conventional loans require private mortgage insurance (PMI) if your down payment is less than 20%. If you use a bridge down to increase your down payment past that threshold, it can help you avoid this cost, which increases your monthly payment for the life of your mortgage. (PMI typically costs between $30 to $70 monthly per $100,000 borrowed).

Finally, bridge loans usually fund pretty quickly. Depending on your mortgage lender, you can often have your cash within a few weeks. This allows you to act fast when you find that dream home.

On the downside, bridge loans come with higher interest rates than other mortgage options, and they have added fees and closing costs. For some borrowers, bridge loans can also be hard to qualify for because they usually require much higher credit scores than other loans.

Not all financial institutions offer bridge loans. To find bridge loan lenders, you’ll typically need to look to local banks, credit unions, online mortgage companies, and specialty lenders. Often, mortgage companies that serve investors will offer these types of loans. Additionally, some lenders will only offer bridge loans if you also agree to take out your new mortgage with them.

Some mortgage companies that currently offer bridge loans include Guild Mortgage (a national lender), Kiavi in Texas and Banner Bank in California, Idaho, Oregon, and Washington.

Home equity loans can be handy alternatives to bridge loans. These let you borrow from your current property’s equity and put those funds toward your new home purchase. You can then pay off the loan when you sell the house. Home equity loans typically come with fixed rates and are more readily available than bridge loans.

Home equity lines of credit (HELOCs) are similar to home equity loans, except these come with a line of credit — not a lump sum. You might want this type of loan if you’re not sure how much cash you need before your home sale goes through.

Dig deeper: HELOCs vs. home equity loans

Finally, some lenders also offer piggyback loans. These allow you to make a small cash down payment toward the new house (say 10%), use a small loan for the rest of the down payment (let’s say another 10%), and then finance the rest with a traditional mortgage loan (in this case, 80%).

A bridge loan can be a good idea if used and budgeted for responsibly. However, it is risky, comes with higher interest rates than other home loans, and adds a second set of closing costs to your home purchase.

A bridge loan is a short-term loan that can bridge the gap between selling and buying your next home. You can use the funds to make the down payment on your new home or to cover both monthly mortgage payments while you wait for your home to sell.

You’ll need a fairly high credit score to qualify for a bridge loan — sometimes as high as 740. This is much higher than the 620 traditionally required on conventional mortgages.

This article was edited by Laura Grace Tarpley