What Is A Bridge Loan And How Does It Work?

Buying and selling a home at the same time can be a stressful balancing act, especially when your next move depends on selling your current property. That’s where bridge loans come in handy. Designed as a temporary financial solution, bridge loans help cover the gap between two real estate transactions. Whether you’re buying a new home before your current one sells or need fast access to cash, understanding how bridge loans work could help you make confident, informed decisions. We’ll break everything down—from how bridge loans function to whether they’re the right fit for your situation. 

What is a bridge loan? 

A bridge loan is a short-term financing solution designed to “bridge the gap” between buying a new home and selling your current one. If you’re in the process of selling your existing home but find a new home you want to purchase immediately, a bridge loan could provide the funds you need for the down payment or even the full purchase amount before your current home sale is finalized. This loan type is often used in competitive housing markets where timing is crucial. 

How does a bridge loan work? 

Bridge loans are typically secured by your current home and are intended to be repaid quickly—often within 6 to 12 months. The funds can be used to pay off an existing mortgage and apply the remaining balance toward the new home’s purchase. Some bridge loans may require interest-only payments throughout the life of the loan. In these cases, the full loan amount—or principal—is due as a lump sum when the loan term ends, typically once your existing home is sold or refinanced. Others may defer all payments until the sale of the existing property. Once your current home sells, the proceeds are then used to pay back the bridge loan. 

What is a bridge loan used for? 

Bridge loans are most commonly used by homeowners who are transitioning from one property to another. They help resolve timing issues that can arise when trying to buy a new home before selling the old one. This type of financing allows buyers to move forward confidently without having to wait on the proceeds from a home sale. 

• Covering a down payment: If you find a new home before selling your current one, a bridge loan could provide the necessary funds for the down payment, helping you act quickly in a competitive market. 
• Eliminating sales contingencies: By using a bridge loan to pay off your existing mortgage, you can make a non-contingent offer on your new home. A non-contingent offer means that your ability to purchase the new home isn’t dependent on the sale of your current one. This can give you a competitive edge in hot markets, where sellers prefer buyers who are financially ready to close quickly and with fewer uncertainties. 
• Managing overlapping housing costs: A bridge loan could help cover mortgage payments, moving expenses, and other costs during the gap between buying and selling. 
• Avoiding rushed sales: Rather than feeling pressured to accept a lower offer on your current home, a bridge loan allows you the financial breathing room to sell on your timeline. 

The flexibility of bridge loans can make your offer more appealing to sellers and ease the financial strain of moving. 

Bridge loans are most commonly used by homeowners who are transitioning from one property to another. Common uses include: 

• Covering the down payment on a new home before selling your existing one: A bridge loan can supply the upfront funds needed for a down payment when you haven’t yet received proceeds from the sale of your current home. This enables you to move quickly on a new property without waiting for your existing home to sell, helping you stay competitive in fast-moving real estate markets. 
• Paying off the mortgage on your current home to remove contingencies in your offer 
• Managing costs related to buying and selling a home simultaneously. 

Pros and cons of bridge loans 

Like any financial tool, bridge loans come with both pros and cons. Understanding the advantages and disadvantages could help you determine if this type of short-term financing aligns with your homebuying goals and overall financial situation. Here’s a closer look at what you can expect: 

Pros Of Bridge Loan 

• Fast access to funds: Bridge loans can be processed more quickly than traditional mortgage loans, often closing in a matter of days instead of weeks (closing times may vary). This speed is essential when you’re competing with other buyers or need to move fast to lock in your next home. With quick access to financing, you could confidently move forward with your purchase without the delays that typically come with selling your current property first. 
• Non-contingent offers: With funds in hand, you could make a strong offer without relying on the sale of your current home. 
• Flexible repayment options: Some bridge loans offer interest-only payments or deferred payment until your existing home sells. 
• Avoid rushed decisions: Bridge loans give you time to wait for the best offer on your current home, instead of feeling pressured to accept a lower price. 
• Bridge financial gaps: Bridge loans provide the temporary cash flow needed to move from one home to another without financial strain. They help cover costs like down payments, closing expenses, and even moving fees during the in-between phase. This makes it easier to navigate the timing disconnect between two real estate transactions and ensures you don’t miss out on your next home due to financing delays. 

Cons Of Bridge Loan 

• Higher interest rates: Compared to traditional mortgages, bridge loans often come with elevated interest rates and associated fees. This is because they are short-term loans with more risk to the lender, given the uncertain timeline for repayment and dependency on your current home selling. These higher costs could add up quickly, especially if your home takes longer than expected to sell. 
• Short repayment window: Most bridge loans must be paid back within a year, adding pressure to sell your home quickly. 
• Financial risk: If your current home doesn’t sell in time, you may end up carrying two mortgage payments simultaneously—one for your old home and one for your new one. This can quickly strain your monthly budget, especially if your income isn’t sufficient to cover both. Additionally, if your home takes longer than expected to sell or sells for less than anticipated, it could delay repayment of the bridge loan and add unexpected financial pressure. 

Requirements For A Bridge Loan 

While requirements can vary by lender, there are several common benchmarks that borrowers are typically expected to meet. These requirements help lenders assess whether you’re financially equipped to handle the short-term nature of a bridge loan, as well as the risks involved with transitioning between two properties. Most bridge loans include the following criteria: 

• Sufficient equity: You typically need at least 20% equity in your current home. 
• Strong credit score: A score of 600 or higher is often required, though some lenders may expect 680 or more. 
• Debt-to-income (DTI) ratio: A DTI under 50% is preferred to ensure you can manage additional loan payments. 
• Income verification: Lenders will review your income to confirm you can afford the loan, especially if your current home doesn’t sell immediately. 

How do you qualify for a bridge loan? 

Qualifying for a bridge loan involves demonstrating both financial stability and a solid exit strategy. You’ll generally need: 

• A reliable source of income: Lenders will want to verify you have a steady income stream to handle monthly expenses and any potential interest payments during the loan period. 
• Good credit standing: Most lenders look for a credit score of at least 600 to 680, showing you have a strong history of managing credit responsibly. 
• Significant equity in your home: Equity is one of the biggest factors lenders consider, as your current home typically serves as collateral. Having at least 20% equity is often required. 
• A clear repayment plan: You’ll need to outline how you intend to repay the bridge loan—usually through the sale of your existing home or by refinancing once the new property is secured. 
• Low debt-to-income (DTI) ratio: A lower DTI indicates you have manageable debt levels compared to your income, giving lenders confidence in your ability to handle an additional loan. 

Lenders want to see you’re financially prepared to manage two homes, even if only temporarily, and that you have a realistic plan for exiting the bridge loan within the set term. Talking to a loan professional at Direct Mortgage Loans will allow you to understand your options to a greater extent. 

Options for Bridge Loans 

There are a few types of bridge loans to consider, each with its own structure and repayment strategy. Understanding the differences between these options could help you select the one that best aligns with your current financial situation and homebuying goals. Whether you’re looking to fully pay off your existing mortgage or supplement it temporarily, the right bridge loan structure can make your transition smoother and more manageable. 

• First lien bridge loans: These pay off your existing mortgage in full and use your current home as collateral for the new loan. Because the bridge loan replaces your first mortgage, it becomes the primary lien on your property. This structure gives you access to more equity from your current home, which can be especially helpful if you need a larger sum to cover the purchase of your next property. 
• Second lien bridge loans: These allow you to keep your first mortgage and use the bridge loan as a second mortgage. 
• Home equity loans or lines of credit (HELOC): These can be viable alternatives to traditional bridge loans, especially if you have significant equity in your current home and prefer more predictable or extended repayment terms. A home equity loan provides a lump sum with a fixed interest rate and payment schedule, while a HELOC acts more like a credit card, allowing you to borrow and repay funds as needed within a set draw period. These options can offer lower interest rates and greater flexibility but may not be ideal if time is of the essence or if your current home is already on the market. 

Your best option depends on your financial situation, timeline, and how quickly you expect to sell your current home. 

Bridge Loan Alternatives 

If a bridge loan doesn’t fit your needs, don’t worry—there are other financing strategies that might work better for your situation. Depending on your financial goals, timeline, and the level of risk you’re comfortable with, there are several alternatives that can still help you move into your next home smoothly. Here are a few commonly used options: 

• Home equity loan or HELOC: These allow you to borrow against your home’s equity without selling it first. 
• Contingent offers: You could make an offer on a new home that’s dependent on selling your current one, although this may be less appealing to sellers. 
• Personal loan or 401(k) loan: These options could offer fast funding but come with their own risks and limitations. 
• Renting your existing home: If you can rent out your current home temporarily, you may generate monthly rental income that can help offset your mortgage payments while you wait for the right buyer. This strategy can be especially useful if the housing market is slow or if you’re not in a rush to sell. It also gives you the flexibility to wait for favorable market conditions, potentially allowing you to sell your home at a higher price in the future. 

Are bridge loans a good idea? 

Bridge loans could be a smart solution in the right situation, particularly if you’re confident your current home will sell quickly. They offer flexibility and allow you to act fast in a competitive housing market. However, it’s important to weigh the higher interest rates, short repayment window, and risk of carrying two mortgages. Consulting with a loan officer at Direct Mortgage Loans could help determine whether a bridge loan aligns with your financial goals. 

How do you get a bridge loan? 

To get a bridge loan, start by reaching out to a lender like Direct Mortgage Loans. to begin the application process. This typically starts with a consultation to assess your financial situation and discuss your goals for buying and selling your home. You’ll be asked to submit a variety of documents that allow the lender to evaluate your eligibility and determine the right loan structure for your needs. Be prepared to provide: 

• Financial documentation (income, assets, credit history) 
• Details about your current home and mortgage 
• Information about the new property you’re buying 

The lender will review your qualifications, home equity, and repayment strategy to determine eligibility. If approved, you can receive funds quickly to move forward with your purchase. 

Where can I get a bridge loan? 

You could receive a bridge loan through lenders that specialize in real estate financing, such as banks, credit unions, and private mortgage lenders. However, not all lenders offer this type of loan, and the terms vary widely, so it’s important to work with a provider that understands your unique needs. 

Direct Mortgage Loans offers bridge financing options designed to help homeowners smoothly transition from one property to the next. With personalized service and experienced loan officers, DML can guide you through the process and help you understand if a bridge loan is the right fit for your homebuying journey. 

FAQ’s About Bridge Loans 

How do you payback a bridging loan? 

Bridge loans are usually repaid once your current home is sold. In some cases, you may make interest-only payments during the loan term and pay the full balance at the end. Others may require a lump-sum repayment when your home sells or after refinancing. 

What are the risks of a bridge loan? 

The biggest risks include: 

• Not selling your home within the loan term 
• Carrying two mortgage payments simultaneously 
• Higher interest rates and closing costs 

These factors could place stress on your finances if not properly planned for. 

Does a bridge loan affect your credit score? 

Applying for a bridge loan triggers a hard credit inquiry, which may temporarily lower your credit score. Additionally, the added debt from a bridge loan can impact your credit utilization ratio, which may affect your overall score depending on your financial profile.