Buying a new home before selling your current one can feel like a puzzle. You’re trying to move forward, but your money is still tied up in the old place. That’s where bridge loans can help by filling the financial gap so you can complete one step without waiting on the other. But how does it actually work? And is it a good idea for your situation?
Key Takeaways
- A bridge loan is a short-term loan that helps you buy a new home before selling your current one.
- The equity in your existing property typically backs these loans.
- Bridge loans often come with higher interest rates (commonly 10–12%+ today) and additional lender fees.
- Lenders focus heavily on your equity, creditworthiness, and repayment plan.
What Is a Bridge Loan?
A bridge loan is a temporary loan that covers the financial gap when you want to buy a new property but haven’t sold your current one yet. Most people use it to access cash they wouldn’t otherwise have until their home sale is complete.
Lenders usually secure the loan with your existing home. This means the more equity you have, the more you may be able to borrow. Terms for bridge loan financing are short, often six months to a year, because the loan is designed to be paid off once your current home sells.
Bridge loans are not offered by all lenders and are considered a niche product today, often provided by regional banks or specialty lenders rather than large national mortgage companies.
Here’s a bridge loan example: Let’s say your house is already on the market, but you’ve found a new property that fits your needs perfectly. Instead of waiting for your current place to sell, you use a bridge loan to make a competitive offer. Once your existing home sells, you pay back the bridge loan in full.
Pros and Cons of Bridge Loans
Bridge loans can be helpful, but they come with trade-offs:
Pros
You Can Buy Your Next Home Faster
You don’t have to rush your current home sale or miss out on a new property while waiting for everything to line up.
Your Offer Becomes Stronger
Sellers often prefer buyers who aren’t relying on the sale of their current home, especially in competitive markets.
You Get Temporary Financial Flexibility
You can use bridge loan funds for a down payment and closing costs, though many lenders restrict how funds may be used and do not allow discretionary expenses like moving costs.
Cons
Bridge Loan Interest Rates Tend to Be Higher
Since bridge loans are short-term and carry more risk, they cost more than typical mortgage products, with many lenders charging 10–12% or higher plus origination or exit fees.
Two Payments for a Short Period
Depending on the lender, you may be responsible for your original mortgage and interest-only payments on the bridge loan until your home sells.
You Need Solid Equity and Strong Financials
These loans are not always available to buyers with limited equity or lower credit scores, and many lenders require strong credit (often 680–700+) and a combined loan-to-value ratio of 70–80%.
Requirements for Getting a Bridge Loan
Each lender sets their own guidelines, but many look for the following:
A Good Amount of Home Equity
More equity generally means a better chance of approval. Many lenders require at least 20% equity, though requirements vary. More importantly, lenders often cap the combined-loan-to-value (CLTV) ratio at 70–80%.
Steady Income and Manageable Debt
Lenders will review your debt-to-income ratio to see whether you can handle multiple payments at the same time.
A Strong Credit History
You don’t need perfect credit, but lenders usually want to see a history of on-time payments and responsible borrowing, often requiring mid-to-high credit scores for approval.
A Clear Plan to Repay the Loan
Most people repay a bridge loan when their home sells. Some lenders may ask for documentation or timelines for your sale or listing.
Proof That Your Property Is Market Ready
While not always required, some lenders want to confirm that the property is listed or will be listed soon, rather than requiring specific staging or repairs.
How Does a Bridge Loan Work?
A bridge loan works by giving you short-term access to funds secured by the equity in your current home. Here’s how it usually works:
You Apply With a Lender That Offers Bridge Loans
Not all lenders provide this product, and availability varies significantly by region and lender type.
The Lender Determines How Much Equity You Can Borrow Against
For example, if your home is worth $330,000 and you owe $180,000, you have $120,000 in equity. A lender may allow a portion of that to be used for the bridge loan, based on CLTV limits.
You Receive Either a Lump Sum or a Line of Credit
Some lenders offer a fixed amount upfront. Others allow you to draw funds as needed. The structure varies depending on the lender. Some lenders also secure both the departing residence and the new property as collateral.
You Use The Money to Move Forward
People often use bridge loan funds for a down payment, closing costs, or securing a property before their current sale closes.
You Repay The Loan When Your Home Sells
Most borrowers pay off the bridge loan once the sale is final. Some lenders require monthly interest payments during the term, while others allow deferred interest that’s paid off at the end. If your home takes longer to sell than expected, total costs can increase significantly, potentially triggering higher default interest.
Alternatives to a Bridge Loan
A bridge loan is not the only way to handle timing gaps. Here are some options people consider when they want more flexibility:
Home Equity Loan or Home Equity Line of Credit (HELOC)
If you qualify, a home equity product may offer lower interest rates. But this depends on whether your lender allows borrowing when the home is already listed for sale.
Contingent Offers
Some buyers include a clause stating they’ll only proceed with the purchase if their home sells first. It’s common, but it can weaken your offer in a busy market.
Personal Loans
Depending on your situation, a personal loan may be an option for smaller expenses. These loans are often unsecured and come with their own credit and income requirements.
Renting Temporarily
Some buyers choose to sell first, move into temporary housing, and then buy once they have full access to their funds.
Extending Your Closing Date
If both parties agree, extending the timeline can remove the need for short-term financing altogether.
FAQ About Bridge Loans
Are Bridge Loans Only for Homebuyers?
Most commonly, yes. But businesses also use bridge loans to cover short-term cash flow gaps, finance immediate expenses, or secure opportunities before long-term funding arrives. Bridge loans are also widely used in commercial and investment real estate, where terms and structures differ significantly from residential bridge loans.
Do I Need to Sell My Home Within a Specific Time Frame?
Bridge loan terms vary, but most last between six months and a year. You’ll need to repay the loan by the end of the term unless the lender offers an extension.
Can Someone Get a Bridge Loan With Low Equity?
It may be harder. Many lenders rely on home equity to approve this type of loan. If you don’t have enough equity, alternatives like personal loans or adjusting your buying timeline may be more realistic.
Is a Bridge Loan The Same As a Second Mortgage?
Not exactly. A bridge loan is a short-term loan used to fill a timing gap. A second mortgage is longer-term and usually has a different repayment structure. Bridge loans may also be “open” or “closed,” depending on whether the repayment date is tied to a scheduled sale.
Can a Bridge Loan Cover Moving Costs Too?
Some lenders allow funds to be used for related expenses, but many restrict usage to the home purchase itself, so it depends on the lender’s terms and available equity.
Are Bridge Loans Risky?
They carry more risk than standard mortgage products because they rely on timing. If your home takes longer to sell than expected, interest rates add up, increasing the total cost. Borrowers should also consider the risk of carrying two mortgages simultaneously and the potential default interest if the home does not sell within the loan term.