Understanding Bridge Loans & How They Work

Understanding Bridge Loans & How They Work

Buying a new home before selling your current one can be complex, but bridge loans may offer a solution. Explore this program, its benefits, and how to get started below.

Understanding Bridge Loans & How They Work

What Are Bridge Loans?

A fixed-rate mortgage is a home loan with an interest rate that does not change. With a fixed-rate mortgage, you get:

Helps homeowners bridge the gap

A bridge loan is a short-term loan that provides immediate funds to help buyers finance the gap between purchasing a new property and selling their current one.

Repaid by sales revenue

A bridge loan is usually repaid with the funds from the sale of a borrower's existing property or with a new mortgage.

Based on your current home equity

Borrowers can qualify for bridge financing based on the amount of their existing home equity instead of having to meet strict credit regulations. 

What Can Bridge Loans Be Used For?

To take advantage of a limited-time deal

Bridge loans are often used to buy fast-moving properties at an attractive price. Then, when underwriting for a traditional mortgage is complete, those funds are used to pay off the bridge.

To purchase commercial or investment property

This program provides quick access to funds that investors and businesses can use to acquire property while waiting for other financing or sales to close.

To prevent the need for temporary housing 

Residential buyers can also use a bridge loan to buy a new house before the sale of their existing home is completed, so there’s no need to find temporary housing in the interim.

NYFTY Lending Loan Pros

Pros

  • Streamlined approval process
  • Provides flexibility when timing transactions
  • No prepayment penalties
  • Lets buyers act fast in competitive real estate markets
NYFTY Lending Loan Cons

Cons

  • Short-term duration
  • Requires sufficient collateral
  • May have upfront costs

Talk to our mortgage experts today about finding the right loan for you.

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Bridge Loan Alternatives

Home Equity Lines of Credit (HELOCs)

  • Long-term solution
  • Uses your existing equity
  • Provides a revolving line of credit
  • Can be used to cover a new down payment 
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Cash-Out Refinancing

  • Replaces your mortgage with a bigger loan
  • You receive the difference in cash
  • No restrictions on how funds are used
  • Requires sufficient equity
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Conventional Mortgages

  • Provides a permanent mortgage
  • Offers competitive terms for qualified buyers
  • Typically requires a down payment
  • Multiple programs available 
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How Do I Know If a Bridge Loan Is Right for Me? 

You need financing fast

If you need to purchase a new home quickly but haven't yet sold your current one, a bridge loan can provide fast access to the funds you need.

You want to avoid making a contingent offer

If you don't want the purchase of your new home to hinge on the sale of your current one, a bridge loan can help you avoid having to make a contingent offer.

You're not sure how much you can sell your existing home for

If you’re unsure of how much you can sell your current home, a bridge loan can provide a safety net while giving you time to find a buyer at the right price.

When Is the Best Time to Take Out a Bridge Loan? 

The best time to take out a bridge loan for purchase is when you need immediate access to funds to secure a new home. This is particularly the case when timing is critical, like when you come across a rare opportunity or need to compete in a cut-throat real estate market. However, you’ll need to have enough equity in your existing property, so it’s best to wait until you have paid off a significant portion of your mortgage. A bridge loan is most effective when you’re confident about the sale of your current property and can manage both loan payments until your house sells.

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FAQ

If your home doesn’t sell within the term of the bridge loan, you may need to refinance. It’s important to assess the sale potential of your existing property before taking out a bridge loan, including looking at market conditions, comparable home sales, and how long it typically takes to sell a house in your area.
If your home sells for less than the balance owed on the bridge loan, you’ll be responsible for covering the difference. This can mean using personal savings or securing additional financing to pay off the remaining balance. Consider having a backup plan before you take out a bridge loan, since a lower-than-expected sale price could leave you in a position where you owe more than the sale proceeds can cover.
The amount you can borrow is based on key factors that are unique to your circumstances, including the program you choose, how much equity you have in your existing property, and market conditions. Your equity is generally determined by a professional appraisal, minus your current mortgage balance.
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