If you’re about to orchestrate a home purchase and sale simultaneously, you may end up in need of a bridge loan.

This type of loan can potentially remove a large stressor that comes from purchasing and selling a home at the same time: It covers the costs of a purchase while you wait for your current home sale to close.

Let’s take a look at how bridge loans work, the costs and fees involved, when to use one, and the pros and cons to help you determine whether a bridge loan is right for you.

What is a bridge loan?

A bridge loan functions as a short-term loan that acts as a “bridge” when a borrower has a financial gap.

This often occurs when a borrower is in-between the sale and purchase of a new home. In other words, they need the funds from the sale to move ahead with the purchase, but the closing dates aren’t aligned.

Under ideal circumstances, a homeowner would complete the sale of their current home and use those funds to purchase their new one.

For many reasons, this often doesn’t happen as smoothly as one would hope.

When are bridge loans helpful? 

Sometimes a borrower needs to move quickly for a new job opportunity before their old home can sell. Or they need to live in their current home until the purchase of the new one is complete.

Bridge loans often are used to make a sufficient down payment on their new home before their current one is sold, or to put a contingency-free offer on the home.

How does a bridge loan work?

Bridge loan lenders will usually process the loan in one of two ways. 

When a borrower gets a bridge loan, they’ll generally either end up with two mortgages — their current mortgage and the new one — or the lender will roll both mortgages into one.

Two mortgage payments

In the first instance, a lender will provide the borrower with the difference between their current loan balance and up to 80% of the current home’s value.

The funds from the new mortgage are used for the down payment of the new home, and the first mortgage is left as-is until the borrower successfully sells their home and uses those funds to pay off both mortgages.

Borrowers may have two monthly payments for a period of time. 

Other lenders may roll both mortgages into one, a borrower will take out one loan for up to 80% of the home’s value, and use it to pay off the first mortgage and make the down payment on the new home. 

Not all lenders offer this option though, so be sure to check with them first. 

What is home equity?

To get a bridge loan, borrowers must have a certain amount of equity in their home. Your lender sets the amount you must have to borrow. 

Your home equity is the difference between the value of your home and what you still owe on your current mortgage.

While these are two common bridge loan options, each lender will package loans differently. 

Ask your lender how they put together bridge loans so you know what to expect.

How are bridge loans repaid?

Bridge loans often must be repaid within six to 12 months.

This usually isn’t a problem because a borrower will pay back the loan with the funds from their current home’s sale.

Pros and cons of bridge loans

Every loan type has its pros and cons, and bridge loans are no different.

Whether this loan type is right for you depends on your unique needs, goals, and finances.

Weigh these benefits and drawbacks to determine whether a bridge loan makes sense for your situation.

Bridge loans pros

• Make a contingency-free offer on a home, which is more appealing to sellers
• Make a 20% down payment on a home, which eliminates the need to pay private mortgage insurance (PMI)
• Don’t have to wait for your current home to sell before purchasing a home
• Application and approval process is generally faster than traditional loans

Cons of bridge loans

• Must qualify for a bridge loan, which includes meeting credit score, debt, and equity requirements
• Higher interest rates, and must pay closing costs and fees
• Shorter terms can be stressful if you don’t sell your home in time
• Must manage two or more mortgages until you pay them off

If you aren’t sure whether you can qualify for a bridge loan, talk to a lender experienced in these types of loans.

If you don’t currently qualify, they may have other suggestions or alternative options.

What costs and fees are associated with a bridge loan?

Bridge loans have closing costs and fees, which includes:

• Origination fees
• Administration fees
• Appraisal fees
• Escrow fees
• Title insurance

These fees generally are anywhere from 1% to 3% of the total loan amount, but this varies by lender and location.

You’ll also have to pay closing costs and fees for your new home’s mortgage.

Interest rates for bridge loans are higher than traditional mortgage rates, but you can get a better rate by having a good credit score and low debt-to-income (DTI) ratio.

When are bridge loans the most helpful?

Bridge loans can be helpful in a range of circumstances, including the following scenarios:

• You got a new job or job relocation and must move quickly
• The closing date for your new home purchase is before the closing date for your current home sale
• You want to make a 20% down payment on your new home to avoid PMI
• You need to make your purchase offer stand out from the competition with one that isn’t contingent on your current home selling first

This type of loan is particularly helpful in a seller’s market, when competition is hot and a buyer needs to make their offer as hassle-free as possible to get ahead of the other contenders.

It also is helpful for buyers who have no other living options than to stay in their current home until they have purchased a new one.

Apply for a bridge loan with Compass Mortgage

If you’re ready to get started with the bridge loan process, apply today with Compass Mortgage’s team of experienced lenders.

The Compass team treats our customers like family. We care about your unique needs, and promise to be your advocate and partner throughout the loan process.

A dedicated Compass loan officer can help you find the best, most affordable loan option for your home and family, and will go above and beyond to make it happen.