Overview
Bridge financing is a short-term credit product designed to cover a timing gap when buying one home before you’ve sold another. It converts the equity you’ve built in your existing property into cash you can use to make an offer, close quickly, or avoid a contingent sale. For many buyers in competitive markets, a bridge loan can be the difference between winning a bid and losing a property.
Bridge loans are a specialized tool — useful in specific situations but not appropriate for everyone. They are more expensive than standard mortgages and require a clear exit plan. Lenders include national banks, local banks, credit unions, and specialty/private lenders; underwriting focuses on the combined financial picture of both properties rather than just the incoming purchase.
Key authoritative guidance on short-term mortgage alternatives is available from the Consumer Financial Protection Bureau (CFPB), which explains how bridge loans work and the costs to expect (see: https://www.consumerfinance.gov/ask-cfpb/what-is-a-bridge-loan-en-325/).
How bridge financing works (step-by-step)
- Application and underwriting: lenders evaluate your credit, income, and most importantly, the equity in your current home. Expect documentation similar to a mortgage application.
- Loan structure: bridge financing can be structured several ways — a standalone short-term loan secured by your current home, a second lien against your existing mortgage, or a temporary advance rolled into a purchase loan.
- Funding: once approved, you receive funds to use for a down payment, earnest money, or closing costs so you can close on the new home.
- Repayment: typical repayment sources are the sale proceeds of your old home, converting the bridge loan into a permanent mortgage (bridge-to-perm), or refinancing the bridge loan into a long-term mortgage.
- Term: most consumer bridge loans run 3–12 months. If your home does not sell by the maturity date, you may need to refinance, extend the loan, or cover payments out of pocket.
Common bridge loan structures
- Traditional bridge loan: a short-term loan secured by the current home; repayment upon sale.
- Bridge-to-perm: a bridge loan that converts to a permanent mortgage if certain conditions are met. (See our guide on bridge-to-perm loans for more.)
- HELOC or home equity loan as a bridge: some buyers use a HELOC or home equity loan for short-term cash needs; these can be cheaper but depend on availability and lender rules.
Internal links: See the related FinHelp articles “Bridge loans vs refinance: short-term options during home purchase” and “Bridge Loans for Homebuyers: Uses and Risks” for deeper comparisons and investor-focused variations.
- Bridge loans vs refinance: https://finhelp.io/glossary/bridge-loans-vs-refinance-short-term-options-during-home-purchase/
- Bridge Loans for Homebuyers: Uses and Risks: https://finhelp.io/glossary/bridge-loans-for-homebuyers-uses-and-risks/
Who qualifies?
Typical borrower requirements include:
- Substantial equity in your current home (lenders often look for 20%–30% equity after accounting for the bridge loan).
- Stable income and a qualifying debt-to-income ratio.
- Credit score that supports short-term credit; many lenders prefer 620+ but requirements vary.
Lenders underwrite differently: some emphasize the borrower’s overall liquidity and ability to cover both mortgages if needed, while others focus primarily on the value and marketability of the property used as collateral.
Costs and fees you should expect
Bridge loans are pricier than long-term mortgages. Typical cost elements include:
- Interest rate: commonly above standard mortgage rates; consumer bridge loans often fall in a range that can be 1–4 percentage points higher than a comparable long-term mortgage depending on market rates and lender risk appetite.
- Origination fees: commonly 1%–3% of the loan amount.
- Closing costs and appraisal fees: similar to other mortgage transactions.
- Extension or standby fees: if you need to extend the term because your home hasn’t sold.
- Prepayment penalties: some bridge loans carry a penalty for very early payoff; read the loan documents.
Exact rates and fees fluctuate with market conditions. The CFPB provides consumer-facing descriptions of bridge-loan costs and common lender practices (CFPB resource: https://www.consumerfinance.gov/ask-cfpb/what-is-a-bridge-loan-en-325/).
Risks and how to reduce them
Primary risks
- Sales risk: your existing home may take longer to sell or sell for less than expected. If your sale falls through, you could face two mortgage payments plus bridge interest.
- Cost risk: higher interest and fees may erode the proceeds from your sale, especially on a short timeline.
- Liquidity risk: bridges typically require fast payoffs; if you don’t have contingency funds, you may be forced into a costly refinance.
Risk-mitigation strategies
- Build a contingency reserve equal to 2–3 months of housing costs to cover delays.
- Price your current home competitively and stage/prep it to sell quickly.
- Negotiate flexibility with the bridge lender (extensions, payment-only periods, or conversion options).
- Get a conservative sale projection and stress-test scenarios (e.g., sale price 5–10% lower, sale delayed 60–90 days).
Exit strategies (how to repay a bridge loan)
- Sale of existing home: the most common and cleanest exit. Coordinate closing dates and escrow instructions so payoff happens at sale.
- Refinance to a permanent mortgage: if rates or cash flow make sense, refinance the bridge loan into a standard 15- or 30-year mortgage.
- Convert to bridge-to-perm: if available, convert the short-term loan to a long-term mortgage per the lender’s conversion terms.
- Use a HELOC or personal cash: less common but possible if you have other sources of liquidity.
Best practice: document your preferred exit strategy in writing and confirm lender policies for payoffs, conversions, and extensions before signing loan documents.
Example scenario (practical illustration)
Emma owns a home with $200,000 in equity after her outstanding mortgage. She finds a new home and wants to avoid a contingent offer. A lender provides a 6-month bridge loan equal to $100,000 to fund the down payment. Bridge fees and interest over six months total roughly $5,500. Emma lists her current house and, after 45 days, accepts an offer. Sale proceeds pay off the bridge loan and fees; she closes on the new home with minimal delay. If her home had taken six more months to sell, she would have paid more in interest and potentially needed to refinance.
This example shows why conservative planning matters: build buffers for slower-than-expected sales and understand how fees reduce net proceeds.
Alternatives to bridge financing
- Contingent offers: make an offer contingent on selling your current home (less competitive in hot markets).
- Rent-back agreement: negotiate a sale with a short-term leaseback to stay in the home after closing (helps timing but requires buyer agreement).
- HELOC or home equity loan: may offer lower costs but require existing credit access and lender approval.
- Selling first and renting temporarily: minimizes financial complexity but can be disruptive.
Compare bridge loans to these alternatives in our related article on short-term options during a home purchase: https://finhelp.io/glossary/bridge-loans-vs-refinance-short-term-options-during-home-purchase/.
Questions to ask a lender before signing
- Exactly how is interest calculated and when does repayment start?
- Are there prepayment penalties or extension fees?
- What documentation is required for payoff at sale?
- Can this loan convert to a permanent mortgage, and under what terms?
- What happens if my existing home sells for less than the expected amount?
Tax and accounting considerations
Interest paid on a bridge loan may be treated as mortgage interest if the loan is secured by your home and meets IRS rules; tax treatment varies by individual circumstances. Consult a tax professional and see IRS guidance on mortgage interest for homeowners for details.
Quick borrower checklist
- Confirm equity available and lenders’ LTV limits.
- Compare total cost (interest + fees + closing costs) across lenders.
- Build 2–3 months of cash reserves for contingencies.
- Lock down an exit strategy and document timelines.
- Read loan documents carefully for prepayment and extension terms.
Professional disclaimer
This article is educational and does not replace personalized financial, legal, or tax advice. Terms, rates, and underwriting standards change frequently; consult a qualified mortgage professional and a tax advisor before choosing bridge financing.
Authoritative sources and further reading
- Consumer Financial Protection Bureau (CFPB): What is a bridge loan? https://www.consumerfinance.gov/ask-cfpb/what-is-a-bridge-loan-en-325/
- FinHelp related guides: “Bridge Loans for Homebuyers: Uses and Risks” and “Bridge loans vs refinance: short-term options during home purchase.”
If you’d like, I can produce a printable comparison worksheet you can use when getting bridge loan quotes.
