Bridge Loan
Definition and meaning of Bridge Loan in real estate.
Bridge loan is a short-term mortgage loan that allows a borrower to access equity from their current home to purchase a new one before the sale of the current home is finalized.
In more detail
Bridge loans are commonly structured to pay off the mortgage on the existing home and provide the down payment for the new purchase. Once the original home sells, the proceeds from the sale are used to pay off the bridge loan. Lenders usually require a high credit score and a low debt-to-income ratio to approve these loans, as they carry higher interest rates than permanent financing.
This option eliminates the need for a home sale contingency in a purchase offer, making the buyer's offer more competitive in hot markets. However, the borrower must be prepared to handle the high closing costs associated with short-term loans.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Typical interest rate | Higher than standard fixed-rate mortgages |
| Key benefit | Removes the need for a home sale contingency |
| Repayment source | Proceeds from the sale of the buyer's current home |
To buy a new condo without waiting for their existing house to sell, a couple takes out a bridge loan to pay off their old mortgage and fund the condo's down payment.
Frequently asked questions
What happens if my home does not sell before the bridge loan term ends?
Borrowers may face severe financial strain, including refinancing the loan at a higher rate, facing foreclosure, or being forced to lower their asking price to sell quickly.
Can I get a bridge loan without a signed contract on my current home?
Some lenders offer bridge loans without a signed contract, but they will require a lower loan-to-value ratio and higher equity margins to mitigate their risk.