Mortgages & Home Loans Financing Your Home Purchase What Are Bridge Loans? Bridge Loans Explained By Elizabeth Weintraub Elizabeth Weintraub Facebook Twitter Elizabeth Weintraub is a nationally recognized expert in real estate, titles, and escrow. She is a licensed Realtor and broker with more than 40 years of experience in titles and escrow. Her expertise has appeared in the New York Times, Washington Post, CBS Evening News, and HGTV's House Hunters. learn about our editorial policies Updated on November 30, 2021 Reviewed by Lea D. Uradu Reviewed by Lea D. Uradu Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Examples of Bridge Loans How Bridge Loans Work Pros and Cons of Bridge Loans Average Fees for Bridge Loans Definition A bridge loan is a temporary loan secured by your existing property. It "bridges" the gap between the sales price of your new home and your new mortgage on that residence in the event your existing home doesn't sell before closing. Photo: The Balance / Britney Willson Definition and Examples of Bridge Loans Bridge loans are temporary loans secured by an existing property if your existing property doesn't sell before you close on your new home. Bridge loans help to bridge the gap between the sales price of your new home and your new mortgage. A buyer typically takes out a bridge loan so they can buy another home before they sell their existing residence, to raise the cash for a down payment. How Bridge Loans Work To get a bridge loan, you'll have to apply for it with a lender. Not all lenders have set guidelines for minimum FICO scores or debt-to-income ratios for bridge loans. Funding is guided by more of a "Does it make sense?" underwriting approach. The piece of the puzzle that requires guidelines is the long-term financing obtained on the new home. Some lenders that make conforming loans exclude the bridge loan payment for qualifying purposes. The borrower is qualified to buy the move-up home by adding together the existing mortgage payment, if any, on their existing home to the new mortgage payment on the move-up home. Many lenders qualify the buyer on two payments because most buyers have existing first mortgages on their present homes. The buyer will likely close on the move-up home purchase before selling an existing residence, so they will own two homes, but hopefully only for a short period of time. Note Lenders have more leeway to accept a higher debt-to-income ratio if the new home mortgage is a conforming loan. They can run the mortgage loan through an automated underwriting program. Most lenders will restrict the homebuyer to a 50% debt-to-income ratio if the new home mortgage is a jumbo loan, however. Pros and Cons of Bridge Loans Pros A homebuyer can purchase a new home and put their existing home on the market with no restrictions. You might gain a few months free of payments. Under certain circumstances, you can still buy a new home even after removing the contingency to sell. Cons A bridge loan is typically more expensive than a home equity loan. You must be able to qualify to own two homes. Handling two mortgages at once, plus the bridge loan, can be stressful. Pros Explained A homebuyer can purchase a new home and put their existing home on the market with no restrictions: You can immediately use the equity in your existing house to buy a new home, without having to wait until the old home sells, when you use a bridge loan for a real estate transaction. You might gain a few months free of payments: Bridge loans offer homeowners the flexibility of paying when they have the cash flow, at least for a period of time. Under certain circumstances, you can still buy a new home even after removing the contingency to sell: A buyer can also remove the contingency to sell from their offer contract and still move forward with the purchase if they've made a contingent offer to buy, and the seller issues a notice to perform. Note Many sellers won't accept such a contingent offer in a seller's market. Having a bridge loan in place can make your move-up offer more attractive. Cons Explained A bridge loan is typically more expensive than a home equity loan: You might end up paying higher interest costs on a bridge loan than you would on a home equity loan. Typically, the rate will be about 2% higher than that for a 30-year, standard fixed-rate mortgage. You must be able to qualify to own two homes: Not everyone can qualify for two mortgages at once, which means a bridge loan may not be an option for some. Handling two mortgages at once, plus the bridge loan, can be stressful: Some people feel stressed when they have to make two mortgage payments while they're accruing interest on a bridge loan. It can be even more stressful if the home they're trying to sell isn't getting any offers. Average Fees for Bridge Loans Terms vary among lenders and locations, and interest rates can fluctuate as well. For example, a bridge loan might carry no payments for the first four months, but interest will accrue and come due when the loan is paid upon sale of the property. There are also varying rates for different types of fees. The administration fee might be 8.5%, and the appraisal fee might be 4.75% on a $10,000 loan. Certain fees will be charged at a higher rate than others. Bridge loan fee examples based on a $10,000 loan include: Administration fee: $850 Appraisal fee: $475 Escrow fee: $450 Title policy fee: $450+ Wiring fees: $75 Notary fee: $40 There's typically a loan-origination fee on bridge loans as well. The cost is based on the amount of the loan, with each point of the origination fee equal to 1% of the loan amount. Generally, a home equity loan is less expensive than a bridge loan, but bridge loans offer more benefits for some borrowers. And many lenders won't lend on a home equity loan if the home is on the market. Alternatives to Bridge Loans You can fund a down payment for the move-up home in one of two ways if you don't have the cash for a down payment, and your existing home hasn't sold yet. You can finance a bridge loan, or you can take out a home equity loan or a home equity line of credit. In either case, it might be safer and make more financial sense to wait to sell your existing home first before buying your next home. Ask yourself what your next step will be if your existing home doesn't sell for quite some time. You could be financially supporting two residences for the duration. The main advantage of a bridge loan is that it allows you to avoid a contingent offer along the lines of, "I'll buy your home if my home sells." But this is generally only advisable if you're sure your home will sell, or if you have a plan in place in case it doesn't. Key Takeaways Bridge loans allow homebuyers to close the deal on a new home before they have sold their existing home.Bridge loans typically come with higher interest rates than home equity loans, and they can cost thousands of dollars to establish.Even though the buyer plans to sell their old home, they are technically owning two homes at once, and lenders will consider whether they're qualified before issuing a bridge loan. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Quicken Loans. "Bridge Loans: What They Are and How They Work in Real Estate." Accessed Aug. 3, 2021. Axos Bank. "What Is a Bridge Loan?" Accessed Aug. 3, 2021. AB Capital. "The Pros and Cons of Bridge Loans." Accessed Aug. 3, 2021.