A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.
But there are pros and cons to using this type of financing. A bridge loan can prove expensive.
Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.
Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.
What Is a Bridge Loan?
A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.
Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).
Most bridge loans are set up to be repaid within a year.
How Does a Bridge Loan Work?
Typically lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.
Even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.
What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.
You’ll also have to have enough home equity (usually 20%, but some lenders might require at least 50%) in your current home to qualify for this type of interim financing.
Lenders typically issue bridge loans in one of these two ways:
• One large loan. Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.
• Second mortgage. Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.
It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.
Bridge Loan Costs
A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.
Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay:
• 1.5% to 3% of the loan amount in closing costs
• An origination fee, which can be as much as 3% of the loan value
Interest rates for bridge loans are generally higher than conventional loan rates.
Repaying a Bridge Loan
Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due.
Others call for a lump-sum interest payment that is taken from the total loan amount at closing.
A fully amortized bridge loan requires monthly payments that include both principal and interest.
How Long Does It Take to Get Approved for a Bridge Loan?
Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.
A bridge loan for investment property from a hard money lender can be approved and funded within a few days.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Examples of When to Use a Bridge Loan
Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date.
Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.
Common scenarios when homebuyers might consider a bridge loan include the following.
You’re Moving for a New Job, or Downsizing
You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.
Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.
Your Closing Dates Don’t Line Up as Hoped
Even if you’ve sold your current home, the new-home closing might be scheduled days, weeks, or even months afterward. To avoid losing the contract on the new home, you might decide to get interim funding.
You Need Money for a Down Payment
If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.
Bridge Loan Benefits and Disadvantages
As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.
Benefits
The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.
Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.
Disadvantages
Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.
Borrowers can expect to pay a higher interest rate, as well as several fees.
Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.
If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan.
Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.
Alternatives to Bridge Loans
If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.
HELOC
Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow, as needed, up to an approved limit, from the equity you have in your house.
The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.
You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)
Many lenders won’t open a HELOC for a home that is on the market, so it may require advance planning to use this strategy.
Home Equity Loan
A home equity loan is another way to tap your equity to cover the down payment on your future home.
Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.
You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty.
Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.
401(k) Loan or Withdrawal
If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).
Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.
Personal Loan
If you have a decent credit history and a solid income, typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.
Other benefits:
• You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.
• A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.
• You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.
• Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.
The Takeaway
A bridge loan can help homebuyers when they haven’t yet sold their current home. But a bridge loan can be expensive. Is a bridge loan easy to get? Not all that easy. Only buyers with sufficient equity and strong financials are candidates.
If you find yourself looking to bridge the gap between homes, you might also consider a personal loan or a HELOC.
A personal loan is an alternative worth considering. SoFi offers fixed-rate personal loanss of $5,000 to $100,000 with no prepayment penalty.
And SoFi brokers a home equity line of credit. Access up to 95%, or $500,000, of your home’s equity.
Finally, once you’ve moved into your new home and sold the previous one, you’ll usually want a more traditional mortgage. SoFi can help there, too. Check out SoFi’s mortgage loan offerings.
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