What is a bridge loan and how does it work?

What can you do if you need to finance the purchase of a new home but don’t yet have the proceeds from your current home listed for sale? The solution could be a bridge loan.

What is a bridge loan? It’s a financing vehicle used in real estate transactions to provide cash flow during a transitional period, such as when moving from one home to another. But it’s meant as a temporary solution to funding needs. Lenders will have different guidelines regarding how funds may be used, including Rocket Mortgage®, which offers bridge loans.

Read on to learn more about how bridge loans work, lender requirements, up-front expenses and risks, and various bridge loan alternatives.

What is a bridge loan?

A bridge loan is a financing option that bridges the funding gap until you get permanent financing. Also known as swing loans, bridge loans are typically short-term loans, lasting around 3 months. They can be used to finance the purchase of a new home before selling your existing house or to get the existing home ready to sell.

“Homes move quickly, but timing can get tricky – so this loan fills the gap while you wait for your sale to close,” says Andrew Fortune, a REALTOR® based in Colorado Springs, Colorado. “Most people pay it off in a year or less when their old house sells. It can enable you to purchase that perfect home when you cannot afford to wait.”

Bridge loans come in handy when:

• You can’t afford a down payment without first selling your current house.
• You need to quickly secure a new home due to a career transition.
• The closing date for your new home purchase is scheduled after the closing date for the sale of your home.
• You prefer to secure a new property before listing your current one.
• Sellers in your desired area aren’t comfortable with contingent purchase offers.

“Bridge loans are also helpful to property investors who want to make improvements to a current property and pay off the bridge loan with proceeds from the sale,” says Ralph DiBugnara, president of Home Qualified, based in New York City.

Most home sellers prefer to wait until their house is under contract before placing an offer on a new house. This way, they can use money from the sale of their current property to help finance a new one. If you’re unable to sell your home, bridge financing can provide you with the necessary funds to move forward with buying a new home.

Characteristics of bridge loans

Thinking about taking out a bridge loan? It's smart to understand both the general features of this loan type and the details involved, which will depend on the bridge loan you choose. Carefully consider the following factors:

• Purpose: Some bridge loans are designed to pay off your first mortgage at the time the bridge loan closes. Others add new debt onto the overall amount owed.
• Duration: Bridge loans typically run 3 – 12 months.
• Repayment terms: Some lenders may obligate you to make monthly payments when you borrow with a bridge loan. Others could require a mix of up-front and/or end-term or lump-sum payment charges.
• Interest rates: Interest rates for bridge loans tend to be about 2% above the prime rate and are generally higher than rates on conventional loans.
• Collateral: The borrower’s current home is typically used as a form of collateral when taking out a bridge loan.

How does a bridge loan work?

Remember: A bridge loan isn’t designed to replace long-term financing in the form of a traditional type of home loan. Instead, it provides a financial bridge until you receive permanent funds.

It’s also important to note that a bridge loan’s terms, conditions, and fees can vary greatly from one transaction to another and from one lender to another. Costs and payment structure can also vary considerably between lenders.

Here are the typical steps involved with getting a bridge loan:

1. Apply for the bridge loan with the lender.
2. Wait for approval, which can take as few as 72 hours.
3. Receive funding, sometimes within as little as 2 weeks.
4. Use the funds to pay for your new purchase.
5. Pay off your bridge loan when your current home eventually sells.

If you’re determined to pursue a bridge loan, you have two main options. First, you can use a bridge loan as a second mortgage to put toward the down payment on your new home until you can sell your current home. Or, you can take out one large loan to pay off the mortgage on your old home, then put the remaining money borrowed toward the down payment on your new home.

Bridge loan mortgage requirements

Applying for a bridge loan works similarly to applying for a conventional mortgage. As with the latter, you’ll need to submit important documents and paperwork. Your loan officer will review your credit score, credit history, and debt-to-income ratio (DTI) when considering your application. Keep in mind that some bridge loan lenders require a credit score of 740 or higher and a DTI below 50%, but these requirements vary by lender.

Most lenders will allow loan applicants to borrow up to 80% of their loan-to-value ratio (LTV). In other words, you’ll typically need at least 20% equity in your current home to qualify. You may also need to meet additional financial qualifications, depending on the lender.

What to consider before getting a bridge loan

Whenever you are considering any form of financing, it’s crucial to do your research and fully understand the loan details and lender expectations.

Two components of a bridge loan you’ll want to consider include the up-front expenses – such as closing costs – and what protection will be available to you if your home sale falls through. Let’s explore these in more depth.

Up-front expenses

Even though they can be approved relatively quickly, bridge loans incur closing costs and origination fees, as is also true of traditional mortgage loans. These fees can add up to a few thousand dollars. You may also be required to pay for an appraisal.

Potential risks

One of the biggest caveats of taking out a bridge loan is that you’ll have to repay it within 3 to 12 months – even if your current home doesn’t sell. Let’s say you decide to remain put and never purchase a new home; if so, you’ll still have to come up with the cash to pay back your bridge loan on time.

Also, your protections as a buyer are often limited if the sale of your current home falls through. It’s important to read the terms and conditions associated with any bridge loan offer. Your biggest risk here? Because bridge loans are secured with your existing property, a lender can foreclose on that property if payments aren’t met.

In light of this, carefully consider how long you can afford to go without financial relief if a home sale stalls. Likewise, think about how you can avoid overextending yourself on any amount borrowed. It’s beneficial to do extensive research into the current real estate market and how long homes take to sell in your area.

Pros and cons of bridge loans

As with all forms of lending and financing, bridge loans have their advantages and disadvantages. Here’s a breakdown:

Pros

A bridge loan offers you the opportunity to buy a new house before you’ve sold your current home.

• You can make an offer on a new home without including a sale contingency.
• It provides additional funds in the event of a sudden or time-sensitive transition.
• It presents a helpful short-term solution for financing your way through periods of uncertainty.
• You may have no monthly payments for the first few months.
• There’s potential for interest-only payments, or deferred payments, until you sell.

“Bridge loans offer speed and flexibility for competitive purchases. Approvals can happen within days rather than weeks, making them powerful tools for competitive markets where quick closings matter. They also eliminate sale contingencies that can weaken offers, and they allow you extra time to properly stage and market your current home,” says Stephanie Crawford, a REALTOR® and broker/owner of Brokers Cooperative, in Nashville, Tennessee. “Plus, they provide access to your home’s equity without rushing into unfavorable sale conditions.”

Cons

• Bridge loans come with higher interest rates and a higher APR.
• Most lenders require a homeowner to have at least 20% home equity built up.
• Many financial institutions will only extend a bridge loan if you also use them to obtain your new mortgage.
• While you are allowed to own two houses for a time, managing two mortgages simultaneously can be stressful.
• Difficulty selling your property can lead to future issues, or – in a worst-case scenario – foreclosure.

“People often overlook that bridge loans can add thousands in fees and can pile up payments on two houses at once. If that old house doesn’t sell, the pressure ramps up fast,” Fortune says. “Up-front costs like appraisals and origination fees hit right away, so you need some cash saved up.”

Bridge loan alternatives

Of course, a bridge loan isn’t your only option if you need fast funding. Several other alternative forms of real estate financing can help you make ends meet. Here’s a roundup of some of the most common alternatives.

Home equity loans

Home equity loans¹ are a popular alternative to bridge loans. Under this form of financing, which is secured using your current home as collateral, you can borrow against your home’s equity.

Home equity loans are typically long-term (typically 10 to 20 years) and offer comparable interest rates to bridge loans. But if you sell your current home, you’ll be required to repay your home equity loan at the time of closing.

A home equity loan is often more affordable than a bridge loan, but this option still requires you to carry two mortgages if you buy a new home and don’t sell quickly. You might consider this option if you're planning on keeping the residence you're leaving for an extended period. To help you make a more informed financial decision, use the Rocket Mortgage equity calculator – which can determine if you have enough equity accrued.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) takes the form of a second mortgage. It’s similar to a home equity loan, but it operates like a credit card: You only draw enough funds from your credit line to cover your bridge funding needs. Compared to a bridge loan, a HELOC offers a better interest rate, lower closing costs, and added time to repay borrowed sums.

You can use any amount borrowed with a HELOC to make home improvements and other upgrades. Note that some HELOCs may come with prepayment penalties if you pay off the HELOC within a short period of time.

Rocket Mortgage currently doesn’t offer HELOCs.

80-10-10 loan

An 80-10-10 loan is a financing option that is actually comprised of two mortgages and is sometimes called a “piggyback loan.” It requires less than a 20% down payment and allows you to avoid private mortgage insurance (PMI).

The first number represents your primary mortgage (80% of your home value), the second figure is the second mortgage (10% of home value), and the third figure is your required down payment (10%). Under the terms of an 80-10-10 loan, you pay 10% down, then obtain two mortgages: one for 80% of the new home’s asking price, and a second for the remaining 10%. After selling your current home, you can use any funds left over – after paying off any outstanding balances – to pay off the 10% second mortgage.

Rocket Mortgage currently doesn’t offer 80-10-10 loans.

Personal loan

Have a strong credit history, solid employment, good payment history, and a low DTI? You could be an excellent candidate for a personal loan. This form of financing can be unsecured (meaning your home is not connected to the loan or used as collateral) or secured with a personal asset you offer up to the lender as collateral if you fail to make on-time payments. A personal loan’s terms and conditions will vary by lender.

Rocket Loans℠ offers personal loans and can help you choose the best option for your needs.

The bottom line: Bridge loans have benefits and drawbacks

A bridge loan can come in handy if you need a new home before your existing home has sold. It can get you out of a tight spot or help you scoop up a new home in a hot market.

With a bridge loan, you’ll certainly have more cash in hand to spend on real estate. At the same time, though, you’ll add to your overall debt load, as a bridge loan can be costly. Plus, you may wind up paying off multiple loans simultaneously if your current home doesn’t promptly sell. The best strategy, if possible, is to wait to sell your old house before moving forward to acquire a new property.

If you’re ready to explore a bridge loan or other financing alternatives, start an application for a home loan with Rocket Mortgage to see what you qualify for.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. Not available in Texas. This is not a commitment to lend.