Bridge Loans

A “bridge loan” is basically a short term loan taken out by a borrower against their current property to finance the purchase of a new property.

Also known as a swing loan, gap financing, or interim financing, a bridge loan is typically good for a six month period, but can extend up to 12 months. Most bridge loans carry an interest rate roughly 2% above the average fixed-rate product and come with equally high closing costs.

Bridge loans are generally taken out when a borrower is looking to upgrade to a bigger home, and haven’t yet sold their current home. A bridge loan essentially “bridges the gap” between the time the old property is sold and the new property is purchased.

Home Buying Contingencies

Many purchase contracts have contingencies that allow the buyer to agree to the terms only if certain actions occur. For example, a buyer may not have to go through with the purchase of the new home they are in contract for unless they’re able to sell their old home first. This gives the buyer protection in the event no one buys their home, or if nobody is willing to buy the property at the terms they desire.

When a seller won’t accept the buyer’s contingency, a bridge loan might be the next best way to finance the new home.

How Do Bridge Loans Work?

A bridge loan can be structured so it completely pays off the existing liens on the current property, or as a second loan on top of the existing liens. In the first case, the bridge loan pays off all existing liens, and uses the excess as down payment for the new home. In the latter example, the bridge loan is opened as a second or third mortgage, and is used solely as the down payment for the new property.

If you choose the first option, you likely won’t make monthly payments on your bridge loan, but instead you’ll make mortgage payments on your new home. And once your old house sells, you’ll use the proceeds to pay off the bridge loan, including the associated interest and remaining balance.

If you choose the second option, you’ll still need to make payments on your old mortgage(s) and the new mortgage attached to your new property, which can stretch even the most well-off homeowner’s budget. So make sure you’re able to take on such payments for up to a year if necessary.

Most consumers don’t use bridge loans because they aren’t necessary during housing booms and hot markets. For example, if your home goes on the market and sells within a month, it’s typically not necessary to take out a bridge loan. But now that things have cooled off, they may become a bit more common as sellers experience more difficulty in unloading their homes.

Bridge Loans Can Be Risky

Many critics find bridge loans to be risky, as the borrower essentially takes on a new loan with a higher interest rate and no guarantee the old property will sell within the allotted life of the bridge loan. However, borrowers usually doesn’t need to pay interest in remaining months if their home is sold before the term of the bridge loan is complete. But watch out for prepayment penalties that hit you if you pay the loan off too early!

Make sure you do plenty of research before selling your home to see what asking prices are and how long homes are generally listed before they’re ultimately sold. The market may be strong enough so that you don’t need a bridge loan. But if you do need one, be aware that a home could go unsold for six months, or longer, so negotiate terms that allow for an extension to the bridge loan if necessary.

If you think a bridge loan is right for you, try to work out a deal with a single lender that provides both your bridge loan and long-term mortgage. Usually they’ll give you a better deal, and a safety net as opposed to going with two different banks or lenders.

Also keep in mind that there are other alternatives to a bridge loan such as financing down payments with your 401k, stocks, and other assets. Remember to compare each scenario before signing anything!


14 Comments

  1. Pascale May 12, 2015 at 8:33 am -

    Which lenders provide bridge loans for residential? I asked a couple of big lenders such as BoFA, they don’t any longer.

  2. Colin Robertson May 12, 2015 at 11:35 am -

    Pascale,

    Not sure that the big banks offer bridge loans…kind of a specialty product that you might find with smaller niche lenders. A broker might be able to help you in your search.

  3. Tanya Cummins July 7, 2015 at 9:52 pm -

    I have already sold & closed on my home in Miami, but am looking for a job ( I am a PreK teacher hoping to find a PreK teaching in Orlando). What kind of loan could I get with a willingness to put at least 33% down payment?

  4. cindi cain December 21, 2015 at 8:42 am -

    a lender just told me there was a 3 day right of redemption to our bridge loan. I don’t understand what that means. I know it means funds won’t be exchanged until the 3 days after closing, but why is this nececessary?

  5. Colin Robertson December 21, 2015 at 11:04 am -

    Cindi,

    Do you mean rescission? It’s a cooling off period in case borrowers have a change of heart.

  6. Keith February 22, 2016 at 7:27 am -

    Colin My mother is taking a bridge loan (in PA) because she has not sold her house and wants to move into her a new home. She is being told she has to take her Home off the Market for Two Months. Is this a regulation or the preference of the Lender?

  7. Colin Robertson February 22, 2016 at 6:53 pm -

    Keith,

    Probably a lender-based rule, but maybe an issue many different lenders have.

  8. David Marquardt May 29, 2016 at 10:50 pm -

    Try to convince publishers of your articles to put the date at the top. Some information is very time sensitive. Relying on info that is several years old is not very useful.
    I know this article is recent but still it should have a date.
    Thanks.
    David Marquardt

  9. Colin Robertson June 1, 2016 at 8:20 am -

    David,

    This is a WordPress issue, posts have dates and timeless pages do not, as far as I can tell.

  10. Louise August 18, 2016 at 3:27 pm -

    I’m curious where in Pa your mom was able to get abridge loan. I am trying now but having a hard time finding any lenders who do bridge loans. Any help would be appreciated

  11. Andrew Collette August 22, 2016 at 11:38 am -

    Louise, send me an email at andrew.collette@phmloans.com I would be happy to connect you with someone who can help.

  12. Debbie September 13, 2016 at 10:19 am -

    I’d also like the name in PA – Philadelphia area. Our newly constructed house settlement is mid-September with no buyers for our existing house. House is for sale at $549K, appraised at $575k and we only owe $240K on it…New mortgage is in place so that is good — just need $ for settlement of new house or we lose major $ there.

  13. Leslie October 7, 2016 at 12:50 pm -

    My mother and niece bought a house together using a bridge loan using her paid-for home which she has owned since 1975. My mother passed away last September and in probate, I received the old house and my niece got the new house. I have been paying on the loan every month on time. My niece has let the other house go into foreclosure. This bridge loan was in my mother’s and my niece’s name but attached to the property I inherited. So basically I’m stuck paying off a $60k loan for a house that my niece has abandoned? Is there any way around this? The loan is not in my name at all.

  14. Colin Robertson October 11, 2016 at 8:15 am -

    Leslie,

    While the loan may not be in your name and not affect your personal credit, if not paid it could wind up in default and the property lost. Sounds complicated, may want to consult a professional and/or see if there’s a way to refinance or get the loan current again if you want to keep the properties. Good luck.

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