What is a bridge loan: Our guide
This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer bridge loans in any state. Any information described in this article may vary by lender.
Quick insights
- Bridge loans are short-term loans that can be used to bridge the gap between buying a new home and selling your previous home.
- A bridge loan can be useful in specific homebuying circumstances, but it depends on your situation and lender.
- In general, you could close on a bridge loan faster than you could with a mortgage; however, bridge loans are usually only offered by specialized lenders.
Thinking about selling your home while planning your next move or buying an investment property? Doing both at once can be a delicate balance to avoid financial strain. However, many homebuyers want to use the profit from selling their current home to buy a new one.
If you need an answer to “what is a bridge loan?” and whether it fits your financial situation, here’s more information.
What is a bridge loan?
A bridge loan is a short-term loan used to bridge the gap between purchasing a home and selling your previous one, helping answer “what is a bridge loan?” for many homebuyers. For example, if you want to buy before you sell, you won’t have the profit from the sale to apply to your new home’s down payment. This can be a challenge if you were depending on that money to buy your new home. Instead, you may be able to use the lump sum from the bridge loan to cover the down payment and closing costs on your new home. Then, once your previous home is sold, you can pay back the bridge loan and continue making payments on the new mortgage.
How does a bridge loan work?
Bridge loans may be offered by a variety of financial institutions. However, not all banks provide this type of financing, so it’s important to check with individual institutions. Some companies specialize in bridge loans. While these companies may provide you with a loan in less time, there are fewer consumer protections and regulations than you would find with a traditional mortgage lender.
While the terms for a bridge loan mortgage will vary depending on the mortgage lending institution, below are some of the key characteristics:
- Application period: While the timeline to buy a home with a mortgage loan can vary by lender and situation, final approval and settlement usually take 30-45 days. Getting a bridge loan can be faster because it’s a different type of debt.
- Payments: Depending on your lender, a bridge loan may have monthly payments, interest-only payments or end with a balloon payment.
- Borrowing limits: Limits vary but are usually tied to the home’s value.
When does it make sense to use a bridge loan?
Bridge loans may not be useful for most home purchases. Instead, they’re usually used in one of two situations.
Buying a new home before you sell your old one
If you want to buy a new home before you sell your current one, you may find that you don’t have the funds to cover your down payment and closing costs. Taking out a bridge loan for a home purchase on your current home can help you make a down payment and cover these costs until you’re able to sell your home.
Buying an investment property
Another reason to use a bridge loan is to purchase a property you intend to renovate and then resell for a profit. This is often referred to as flipping a property. With a bridge loan, you can borrow against the value of your current home and use the proceeds to buy or make a down payment on an investment property. Assuming you resell the property at a profit, you can use the proceeds to pay back the loan.
Bridge loan mortgage requirements
To qualify, typical bridge loan requirements include factors such as your debt-to-income ratio (DTI), how much home equity you have, your credit profile and possibly your household income. It helps if you’ve been a good mortgage candidate with your first home.
If you don’t have enough equity in your current home, it may be hard to qualify. If your lender determines you're an ideal candidate, you may experience a faster approval process for a bridge loan than you did for a traditional mortgage.
How to repay a bridge loan
The loan term might range from months to years, and monthly payments are required. There’s usually a final due date when the loan needs to be paid back in full. A final, larger payment called a balloon payment might be due at that time.
The sale of your previous home may help you repay your bridge loan on time and in full. It’s important to work out the terms of repayment with your lender and ensure you’re clear on the steps going forward.
What are the pros and cons of bridge loans?
There are some clear advantages to using a bridge loan. However, it can also come with additional costs and risks you need to consider.
Pros of bridge loans
- Beneficial in a seller’s market: If the market is hot and you’re competing with many other buyers, your application could be seen as more competitive with a bridge loan. A bridge loan can mitigate any mortgage contingencies in your offer. This is desirable to a seller because it’s a better guarantee that the deal will go through.
- No private mortgage insurance (PMI) requirement: You may typically avoid PMI on a conventional loan by putting down 20% or more of the purchase price. If you don’t put down 20%, PMI is required and often included in your monthly mortgage payments.
- Help with the timeline: It can be faster to qualify for a bridge loan than it is to buy a home and finalize a mortgage loan. Getting a bridge loan could mean you buy your new home and not have to rush to sell your current home.
Cons of bridge loans
- Higher interest rates: Since bridge loans are short-term solutions, the lender needs to charge higher rates. These higher rates make lending the money worthwhile for the lender.
- Higher long-term costs: A bridge loan is a financial resource that may be worthwhile or necessary in the moment; however, the interest and various fees you pay are money out of pocket that you won’t be getting back.
- Two mortgage fees: Once the bridge loan closes, you’ll start paying it back in addition to your mortgage. These costs are important to plan for, however long they’re required.
Alternatives to bridge loans
If you’re looking to take money out of an existing piece of real estate, there are alternatives to bridge loans.
Cash-out refinance
A cash-out refinance allows you to borrow against the existing equity in your home by taking out a new mortgage and borrowing more than your current mortgage balance. With a cash-out refinance, you’d need to make regular monthly payments, but you could potentially repay the loan when you sell your house.
Personal loan
A personal loan may be another short-term financing option for covering temporary costs, but it’s typically unsecured and may come with higher interest rates and lower borrowing limits compared to a bridge loan. It may be used for smaller gaps in funding, but it doesn’t leverage home equity like a bridge loan.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) lets you borrow against the available equity in your home. Most lenders will also limit the amount you can borrow based on your home’s appraised value.
In summary
Bridge loans are short-term loans that help cover the gap between buying a new home and selling your current one. This is often done by providing funds for a down payment and closing costs before your sale proceeds are available.
Repayment is typically monthly with a payoff deadline, and some loans end with a larger balloon payment—often intended to be repaid once the prior home sells. Typical qualification factors may include debt-to-income ratio, available home equity and credit profile. Availability and terms vary by lender, and they’re often offered by specialized lenders rather than banks or credit unions.
Bridge loan FAQs
Is it a good idea to get a bridge loan?
While bridge loans can be effective for short-term real estate purchases or to cover the time between buying a home and selling a home, it may not be the best option if you’re looking to make a long-term real estate purchase.
What is the difference between a bridge loan and a mortgage?
A mortgage loan helps you buy and pay for a home over a long time. You make monthly payments that cover both the loan and interest, and the length of the loan is usually 10 to 30 years.
On the other hand, a bridge loan is a short-term loan that helps buyers cover a down payment on a new home without first selling their house. Bridge loans typically only last six months to three years and end the repayment period with a balloon payment.
