What Is a Bridge Loan? How It Helps You Buy Before You Sell

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1. What Is a Bridge Loan?
2. How a Bridge Loan Works When Buying a Home
3. Common Bridge Loan Terms and Repayment Structures
4. Bridge Loan Pros and Cons
5. Who May Qualify for a Bridge Loan?
6. When a Bridge Loan Can Make Sense
7. When Bridge Financing May Be Too Risky
8. Bridge Loan Alternatives
9. The Bottom Line: Bridge Loans Solve a Timing Problem

What Is a Bridge Loan?

A bridge loan is short-term home financing that may help homeowners buy a new property before selling their current home. Instead of waiting for sale proceeds to fund the next down payment, you have the option to use available home equity as temporary capital. The loan “bridges” the timing gap between two real estate transactions: the purchase of the next home and the sale of the existing one.

For example, if your current home has $200,000 in equity but hasn’t sold yet, a bridge loan could let you use part of that equity for a down payment on your next home—so you can move forward before the sale closes.*

How a Bridge Loan Works When Buying a Home

You might be able to use bridge loan funds for the down payment, closing costs or to pay off existing debt, depending on the lender and loan terms. The money from the sale of your current home is typically used to pay off the bridge loan.

Before approving a bridge loan, the lender will review:

• The value of your current home and your home equity
• Your current mortgage balance
• The value of the home you want to buy
• Your credit profile
• Your debt-to-income (DTI) ratio

Common Bridge Loan Terms and Repayment Structures

Bridge loans are designed to be temporary. Most bridge loans last six to twelve months, though the exact length varies by lender. Some bridge loans require monthly payments immediately, while others allow interest-only payments or deferred payments until the old home sells. Because lenders take on more timing risk, bridge loans can carry higher rates, origination fees and closing costs than standard first mortgages.

Newrez does not originate bridge loans directly. Instead, we work with third-party lenders, such as Knock or HomeLight^®, that offer financing options to eligible borrowers. These bridge loans typically have terms of four to six months and do not require monthly payments. Instead, the third-party lender charges a fee that is deducted from the bridge loan funds. Fees vary by lender and product.

Bridge Loan Pros and Cons

Who May Qualify for a Bridge Loan?

Bridge loan eligibility is usually strongest for borrowers with substantial equity, a solid credit profile, stable income and enough reserves to handle multiple payments at the same time. Lenders may review the expected listing price, market demand, current mortgage payment, new loan amount and whether the borrower can realistically repay the bridge loan if the sale takes longer than planned.

When a Bridge Loan Can Make Sense

A bridge loan may be a good fit if you’re buying in a competitive market and have meaningful equity in your current home. It also takes pressure off you as a seller, because you get the funds to buy your new home even if selling takes longer than expected.

When Bridge Financing May Be Too Risky

Bridge financing can be higher risk if your current home may sit on the market for a long time, you don’t have much available in savings, or you would struggle to make both your existing mortgage payment and the bridge loan payment.

In some situations, like a slower buyer’s market, selling first and renting temporarily may be less convenient but financially safer, especially if your current home takes longer than expected to sell. Even if you can get a bridge loan, you’ll want to make sure you can make payments for a while if the sale takes longer than expected.

Bridge Loan Alternatives

If a bridge loan isn’t the right fit, there are other ways to buy a new house before you’ve sold your current home.

• Home equity loan**: You keep your primary mortgage and take out a second mortgage to access your equity.
• Home equity line of credit (HELOC)***: You have a set amount of credit available to you and only pay interest on the amount you borrow, which makes this a good fit if you have unpredictable expenses. You’ll pay a variable interest rate, and there’s a draw period followed by a repayment period.
• Cash-out refinance****: You refinance your mortgage into a new, larger loan. You receive the difference between the new mortgage amount and the original balance as a cash lump sum.
• “Piggyback” second mortgage: You take out a second mortgage (a home equity loan or HELOC) at the same time as your main mortgage. Your first mortgage is 80% of the home’s price, your second mortgage is 10% of the home’s price and you make a 10% down payment. Newrez does not offer a "piggyback" second mortgage as of the publication date. However, being aware of the product may help you make a more informed decision as you explore your options.
• Making an offer with a home sale contingency: This means the buyer will only buy the home if they are able to sell their current home first. If they cannot sell their home in the agreed-upon timeframe the sale agreement may be cancelled without penalty, depending on the terms of the contingency.

The Bottom Line: Bridge Loans Solve a Timing Problem

A bridge loan can be a practical tool for homeowners who need to buy before they’re able to sell their current home. It can give you the flexibility to move quickly and make a competitive offer, but it also comes with higher costs and added risk if your home doesn’t sell as expected—so it may be better for borrowers with strong finances and a clear repayment plan.

If you want to explore a bridge loan or other home loan options, reach out to a Newrez mortgage expert to learn more.