A bridge loan works by letting you borrow against the equity in your current home to fund the purchase of a new one before the old house sells, then repaying the full balance from the sale proceeds. The loan is short-term, usually six to twelve months, and it exists to cover the gap between closing on the new property and cashing out of the old one. Because the money is in hand at closing, you can make an offer without a home-sale contingency, which carries real weight in a competitive market.
How the Money Moves
Your current home is the collateral. The lender looks at its appraised value, subtracts what you still owe on it, and sizes the bridge loan from the equity that remains. In practice, you can generally finance up to 80 percent of the combined value of both homes, with the balance covered by your existing equity, your savings, or some mix of the two.
Monthly payments are typically interest-only during the bridge period, so you’re not chipping away at principal while you’re carrying debt on two properties. Some lenders offer a deferred-payment option with no monthly payment at all: interest accrues over the term and gets added to the final payoff. That keeps cash flow clean while you wait for the sale, but the amount you ultimately owe grows.
First-Lien vs. Second-Lien Structures
Lenders usually write a bridge loan in one of two shapes, and the choice affects how many payments land on your desk each month.
- A first-lien bridge loan pays off your existing mortgage and replaces it with a single, larger short-term loan. One monthly payment during the bridge period.
- A second-lien bridge loan sits behind your existing mortgage, which stays in place. You make two payments: one on the original mortgage, one on the bridge loan.
The first-lien version is larger because it absorbs the old mortgage balance, but a single payment is simpler to manage. The second-lien version leaves your original mortgage alone, which can matter if you’re sitting on a low rate you’d rather not give up before the house sells.
What It Costs
Bridge loans carry higher interest rates than standard mortgages because the terms are short and the risk is real. Rates generally run about two to four percentage points above the going rate on a 30-year fixed mortgage, often landing between 7 and 11 percent depending on the lender, your credit, and the loan size.
On top of the rate, plan for:
- Origination fees, typically 0.5 to 2 percent of the loan amount.
- Closing costs of roughly 1.5 to 3 percent, covering title insurance, recording fees, and administrative charges.
- Appraisal fees on both properties, each costing several hundred dollars.
The numbers add up. On a $200,000 bridge loan, origination and closing costs alone can run $3,000 to $10,000 before any interest accrues. The monthly payment is only part of the picture; the full cost of borrowing for a few months is what you’re really comparing against the alternatives.
What You Need to Qualify
Lenders set financial benchmarks because they’re underwriting someone who will temporarily owe money on two properties. Criteria vary, but common thresholds include:
- At least 20 percent equity in your current home after the bridge loan is applied.
- A credit score around 680 or higher, with some lenders preferring 720.
- A debt-to-income ratio, counting the bridge loan and any existing mortgage, that stays under roughly 43 to 50 percent.
- Your current home listed for sale, or a concrete plan to list within the loan term.
One regulatory wrinkle worth knowing: bridge loans with terms of 12 months or less are exempt from the ability-to-repay analysis that federal rules require for most residential mortgages.1eCFR. 12 CFR 1026 – Truth in Lending (Regulation Z) Lenders aren’t legally required to verify repayment ability under the same standards that apply to a 30-year mortgage, though most still run their own underwriting. The Truth in Lending Act still requires full disclosure of the rate, fees, and repayment schedule before you sign.2Office of the Law Revision Counsel. 15 USC 1601 – Congressional Findings and Declaration of Purpose
How the Loan Gets Repaid
The sale of your current home is the primary repayment trigger. When that sale closes, the title company directs part of the proceeds to pay off the bridge loan in full, principal plus any accrued interest. If you chose the deferred-payment structure, the accrued interest is baked into that payoff.
Many bridge loans include a balloon provision: the entire remaining balance becomes due on a fixed date whether or not the house has sold. The deadline usually sits at the six- or twelve-month mark, matching the loan term.
If You Need More Time
When the home hasn’t sold by maturity, you may be able to negotiate an extension rather than default. Extensions aren’t free. Lenders commonly charge an extension fee of 0.5 to 1.5 percent of the remaining principal, plus legal and documentation fees that can range from several hundred to a few thousand dollars. Some lenders also bump the interest rate during the extension. Stepped pricing is common: a first three-month extension might cost half a point, a second three-month extension a full point.
What Happens If the Old Home Doesn’t Sell
This is the real risk. If you can’t sell before the loan matures and can’t get an extension, costs escalate quickly.
- You may end up carrying a mortgage on the old home, a mortgage on the new home, and the bridge loan all at once. Savings drain fast under that weight.
- Once the loan enters default, lenders can impose penalty interest rates and forbearance fees that significantly raise the cost.
- As a last resort, the lender can foreclose on the property securing the bridge loan. Depending on how the loan is structured, that could mean losing your original home, your new home, or both if both serve as collateral.
Before signing, think about how long homes actually sit on the market where yours is located. If local inventory moves slowly, the added cost and risk of a bridge loan may not be worth the convenience.
When Another Option Fits Better
A bridge loan isn’t the only way to buy before you sell. A few alternatives are worth weighing:
- A home equity line of credit lets you borrow against your current home’s equity on a revolving basis, usually at a lower rate than a bridge loan, with repayment stretching five to 30 years. The catch is setup time: a HELOC can take two to six weeks to open, so you need to arrange it before you start house hunting.
- A home equity loan works similarly but comes as a lump sum with fixed monthly payments. Useful when you know exactly what you need, though it also takes longer to arrange than a bridge loan.
- A contingent offer lets you back out of the new purchase if your current home doesn’t sell. It costs nothing, but sellers in competitive markets often pass on contingent offers in favor of buyers with guaranteed funding.
- A sale-leaseback has you sell the current home first and rent it back from the buyer for a short period while you close on the new one. You avoid two mortgages, but it depends on finding a buyer willing to agree.
Each option trades speed against cost and risk differently. A HELOC generally wins when you can plan several weeks ahead; a bridge loan tends to make sense when you need the funds quickly and have strong equity in the home you’re leaving.