If you find yourself moving between homes, especially on short notice, a short-term bridge loan can be a useful tool to cover costs. However, it’s important to understand that it also comes with certain risks.

A bridge loan, also known as a gap loan, hard money loan, or swing loan, is a short-term financing option commonly used when transitioning between homes. Typically secured by your current home, it can also be secured against other assets in some cases.

Homeowners dealing with sudden life changes, such as relocating for work, often turn to bridge loans to assist with expenses related to purchasing a new home. This can include covering the down payment or managing concurrent mortgage payments for two properties. Real estate investors also frequently utilize bridge loans, especially in property flipping scenarios.

The key distinction between a bridge loan and a traditional loan lies in the repayment timeline. Bridge loans usually have a shorter term, typically lasting from six to 12 months, whereas mortgage terms can extend up to 30 years. Additionally, bridge loans are often funded much faster than traditional mortgages, with some lenders disbursing funds in as little as two weeks.

Bridge loans come in a wide range of structures, costs, and terms. If you qualify, you can borrow a substantial amount, from several hundred thousand dollars to over $1 million.

For instance, a bridge loan mortgage might involve leveraging equity from your current home to use as a down payment on a new property, or taking out a larger mortgage for the new property. Another type of bridge loan utilizes both homes as collateral. Payment structures vary, including monthly payments, interest-only payments, or upfront and balloon payments.

However, most bridge loans share several common features:

  • Typically, they have short-term durations of six months to one year, though some can extend up to three years.
  • They are secured by the borrower’s existing home.
  • Lenders often require the borrower to also finance the mortgage on the new property with them.
  • Interest rates can vary widely, ranging from the prime rate to the prime rate plus 2 percentage points.
  • Credit Score: Bridge loan lenders offer more flexibility in underwriting, making it possible to qualify with a credit score as low as 500. However, some lenders may require a higher score, typically in the high-600s.
  • Debt-to-Income (DTI) Ratio: Certain bridge loan lenders accept DTI ratios as high as 50 percent, accommodating borrowers with higher debt loads.
  • Equity: For traditional bridge loans, many lenders stipulate a minimum of 15 percent equity in your current home. Some may require 20 percent equity as a condition for approval.
  • Quick Cash Access: Bridge loans are ideal for urgent transactions, with some lenders able to fund within just two weeks.
  • Payment Flexibility: Borrowers can opt to defer payments until their current home sells or choose interest-only payments.
  • No Contingency Needed: Unlike traditional home purchases, bridge loans do not require a contingency that the old home must sell first to fund the new purchase.
  • Equity Requirements: Many lenders mandate at least 20 percent equity in the current home, which may pose a challenge for some borrowers.
  • Financing Conditions: Some lenders may only offer a bridge loan if it’s used in conjunction with financing for the new home mortgage.
  • Higher Costs: Bridge loans typically come with higher interest rates and APRs compared to conventional mortgages.
  • Limited Protections: Bridge loans often lack borrower protections if the sale of the old home falls through. Lenders may proceed to foreclose on the old property if repayment becomes an issue.

Applying for a bridge loan mirrors the process of applying for a standard mortgage:

  • Assess Your Home Equity: Calculate your home equity by subtracting your current mortgage balance from your home’s current market value. Typically, lenders cap bridge loan amounts at 80% to 85% of your home equity.
  • Research Lenders: Some providers of bridge loans include CoreVest, Guild Mortgage, and Knock. Note that not all mortgage lenders offer bridge loans, so it’s essential to explore your options.
  • Understand Loan Terms: Contact a loan officer from your chosen lender to understand their specific requirements and the structure of their bridge loan program. Each lender may have different terms and conditions for their bridge loans.

If you’re considering a bridge loan, expect to encounter higher interest rates compared to standard conventional mortgage loans. Most bridge loan lenders peg their rates to the prime rate, currently at 8.5 percent, with some adding a few percentage points on top. These loans typically carry higher rates because they are short-term solutions designed to provide rapid access to funds, and lenders charge more for this expedited service.