Bridge Loan

A bridge loan is a form of short-term financing that helps you “bridge” the financial gap between selling your current home and buying a new home. You can use the proceeds from the bridge loan to cover the down payment and closing costs on a new property, which enables you to buy a new home before the first one is sold.

How does a bridge loan work?

The bridge loan is secured by your current property, serving as a kind of “second mortgage.” If you’re wondering why buyers don’t simply get a second mortgage, rather than a bridge loan, here’s why: Lenders don’t want to give mortgages that will be paid off in a few months or years. They don’t make any money on interest. Instead, they offer bridge loans, which may come with higher fees and interest rates. That way, borrowers can pay the loan off quickly once their current property is sold, and the lender still makes a profit.

• A bridge loan is a form of short-term financing that helps you “bridge” the financial gap between selling your current home and buying a new home.
• The repayment timeline on a bridge loan is much shorter than with a standard mortgage loan. Typically, you’ll need to repay the loan within 6-36 months, depending on your lender’s terms.
• “The idea is that, once you sell your old house, you’ll pay off the bridge loan,” explains Martin Orefice, CEO of Rent To Own Labs.

To qualify, you’ll need to meet your lender’s borrower requirements for credit score, debt-to-income ratio (DTI)*, and other qualifying factors. You’ll also need sufficient home equity, though lenders may only allow you to borrow up to 80% of your current property’s equity.

Key Points

• A bridge loan can give you the cash needed to purchase a new home before you sell your current one.
• Bridge loans are similar to second mortgages in that they are secured against your house, but they have a much shorter repayment term.
• If your house doesn’t sell as quickly as you hoped, you may have a difficult time repaying the bridge loan plus the mortgages on your new and former homes.

Investors using a short-term loan on a rehab often ask what comes next. Our guide to bridge and DSCR financing for an Ohio BRRRR walks through how short-term money hands off to long-term hold financing on a rental.