How they differ — quick comparison

  • Purpose: Bridge loans cover timing gaps (buying before selling, quick acquisitions). Construction loans pay for building or large renovations.
  • Disbursement: Bridge loans are typically a lump sum or temporary credit line; construction loans use a draw schedule tied to inspections/milestones.
  • Term & repayment: Bridge loans usually run 6 months–3 years and expect a clear exit (sale or refinance). Construction loans usually run ~12–36 months and often convert to permanent financing (construction-to-permanent).
  • Costs & underwriting: Bridge loans often carry higher rates and fees because of speed and risk; construction loans require project plans, budgets, and builder documentation.

When to use each

  • Use a bridge loan when you need fast, short-term capital to close a purchase or lock an opportunity while awaiting a sale or permanent financing. See our guide on Bridge Loan Basics for Homebuyers for timing and exit strategies.
  • Use a construction loan when funds are needed over the life of a build or major rehab and you want financing that aligns with progress inspections and draws. If your plan includes moving to a mortgage after construction, read Construction-to-Permanent Loans: Timing, Draws, and Inspections.

Eligibility & documentation

  • Bridge loans: lenders look for equity, liquidity, and an exit plan. Requirements are generally credit score, debt-to-income review, and collateral (often the property being bought or sold).
  • Construction loans: you need architectural plans, cost breakdowns, permits, builder contracts, and a realistic budget. Lenders will inspect completed stages before issuing draws. For details on converting to permanent financing, see Converting a Construction Loan to a Permanent Mortgage.

Costs and common risks

  • Interest structure: construction loans commonly charge interest only during the build; bridge loans may be interest-only or roll interest into the balance.
  • Fees: both can include origination fees, inspection fees (construction), and higher rates than standard mortgages.
  • Exit risk: the biggest single risk for bridge borrowers is failing to sell or refinance before maturity; for construction borrowers it’s cost overruns or delays that exhaust contingency funds.

Real-world examples (short)

  • Bridge loan example: A homeowner needs to buy a new house now but hasn’t sold their current home. A bridge loan covers the down payment so they can close and avoid losing the new property.
  • Construction loan example: A small business builds a headquarters; the lender releases funds at framing, roofing, and near-completion inspections so the owner can pay contractors as work finishes.

Practical tips from practice

In my practice advising homeowners and small developers, I see two reliable ways to reduce risk:

  1. Build conservative exit plans: assume longer sale times or higher permanent rates when sizing a bridge.
  2. Require a robust contingency (5–15%) in construction budgets and insist on regular draw inspections to catch cost drift early.

Common mistakes

  • Treating a bridge loan as long-term financing. These are stopgaps and should have a clear exit.
  • Underestimating soft costs in construction (permits, inspections, utility hookups) which can create funding gaps.

Quick FAQ

  • Can a bridge loan convert to a mortgage? Not directly — but you can refinance the bridge with a permanent mortgage once the exit event (sale or refinance) occurs.
  • Do construction loans require inspections? Yes; lenders typically require inspections before each draw to verify progress.

Authoritative sources

Disclaimer

This article is educational and reflects common industry practice as of 2025. It is not personalized financial or legal advice. For decisions that affect your finances or project, consult a licensed mortgage professional, financial advisor, or attorney.