How does a bridge loan work and what is it?

A short-term loan that bridges the financial gap between purchasing a new home and selling your current one is known as a bridge loan.

In the real estate market, bridge loans are commonly used to provide cash for down payments or closing costs. Additionally, they can be used to pay off old mortgages, flip houses, or supplement renovation financing. However, bridge loans typically have higher interest rates and shorter terms, and since they use your house as collateral, you risk foreclosure if you cannot pay the full amount when the time comes.

What is a bridge loan?

A bridge loan can help cover down payment or closing costs for those who haven't sold their old place yet, and are using the proceeds from the sale of their last house to buy their next one.

Bridge loans are short-term financing options that are typically repaid within six months to a year, with some lenders offering terms of up to three years.

Bridge loans are commonly provided by credit unions and regional banks, with the condition that borrowers utilize them for their new mortgage. However, nonbank lenders do not have this requirement. Unlike traditional mortgages, bridge loans are not protected by the Real Estate Settlement Procedures Act (RESPA), exposing borrowers to the risk of being charged with junk fees or misleading terms.

How does a bridge loan work?

A bridge loan is a brief loan that borrowers typically have to repay within a year or face foreclosure.

Typically, a bridge loan is used to cover both the remaining balance on a mortgage and the down payment for a new home before selling the current one.

To finance a down payment on their new home, borrowers may opt for a bridge loan and use it as a second mortgage on their new home.

You can obtain a bridge loan to cover only the down payment or closing costs, or opt for a larger loan to pay off your current mortgage and make a down payment on your new home.

Besides stable employment and consistent income, lenders also consider these factors.

How much does a bridge loan cost?

Interest rates on bridge loans in November 2024 were higher than those for conventional mortgages and home equity loans, with rates ranging from 7% to 10%.

The cost of closing on a bridge loan is typically between 1.5% and 3% of the total amount borrowed.

Bridge loans vs. traditional loans

Bridge loans often come with higher interest rates and expenses compared to traditional mortgages.

Bridge loans are intended to provide temporary financing during a transition period, while a conventional mortgage has a term of 10 to 30 years. A bridge loan typically lasts for 6 to 36 months, and borrowers make interest-only payments during the term, with a balloon payment at the end. In contrast, a fixed-rate mortgage has steady monthly payments that include a portion of the principal and interest.

A bridge loan can be approved in as little as 72 hours and funded within two weeks, compared to the 43-day average for mortgage closing.

Who offers bridge loans?

Finding lenders who offer bridge loans is one of the most challenging aspects of securing a bridge loan.

Guild Mortgage

Guild Mortgage, a San Diego-based lender, offers a six-month loan term but has earned a place on our lists for the best mortgage lenders and the best lenders for an FHA loan due to its flexible credit score and down payment requirements.

• Loans amount: $40,000 to $300,000
• Terms: 6 months
• Loan-to-value ratio: 85% for purchase and 100% for construction
• Availability: Not available in New York or Texas

Malve Capital

Malve Capital offers bridge loans that can be closed in five business days, with no minimum credit requirement and terms of up to 24 months.

• Loan amount: $50,000 to $5 million
• Terms: 3 months to 24 months
• Loan-to-value ratio: 85% for purchase, 100% for construction
• Alaska, Hawaii, Montana, Nevada, North Dakota, Oregon, South Dakota, Utah, and Vermont do not have availability.

CoreVest

A revolving credit bridge loan is one of the unique offerings of CoreVest, which is among the few lenders to provide bridge loans nationwide.

• Loan amounts: $75,000 to $50 million
• Terms available: 6 months to 24 months
• Loan-to-value ratio: 85% for purchase
• Availability: Nationwide

When a bridge loan makes sense

Before taking out a bridge loan, you must be certain that your old house will sell before the payment deadline.

A bridge loan is typically used to cover closing costs on a new home until the previous house sells, or to make a large down payment or pay off an old mortgage.

A bridge loan can help cover the remaining expenses of your renovation and increase your home's value. Once the renovation is complete, you can refinance using the new appraised value of your home and repay the loan.

You can use the money from the sale of the house to cover the costs of construction or renovation, and then use the proceeds from the sale to repay the loan.

Pros and cons of a bridge loan

Alternatives to bridge loans

If you're not willing to take on the risk, bridge financing isn't your only option.

1. HELOC

A home equity line of credit (HELOC) is a type of loan that allows you to borrow money against the value of your home. Unlike a bridge loan, which usually has a 12-month repayment period, a HELOC offers a 10-year window to draw funds, followed by a 20-year repayment period. However, it can take longer to fund a HELOC than a bridge loan (three to six weeks), so it may not be the best option if you need to close on the loan quickly.

2. Home equity loan

A home equity loan is a type of loan that uses the value of your home as collateral. Unlike a HELOC, which is a line of credit, a home equity loan is a lump sum loan with a fixed rate and repayment terms of 20 or 30 years. If you fail to make payments, a lender can foreclose on your home.

Two of our top picks for home equity loans are Rocket Mortgage, which lends up to 90% of the value of your home, and TD Bank, which accepts lower-than-normal credit scores.

3. Piggyback mortgage

A piggyback mortgage, also known as an 80-10-10 loan, involves taking out a primary mortgage for 80% of the purchase price, a second mortgage for another 10%, and putting down 10% in cash. This allows you to avoid private mortgage insurance, but unlike a bridge loan, you'll need to start making payments immediately.

4. Personal loan

A personal loan is not secured, so there's no risk of losing your home. However, rates tend to be higher and borrowing limits are lower. While you can use a personal loan to help with closing costs, most lenders won't let you use it for a down payment. Additionally, you'll have to start making payments immediately.

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