How to Get a Bridge Loan: A Step-by-Step Guide

A bridge loan can be a useful financial tool for homeowners looking to buy a new house before selling their current one. Also known as a swing loan, a bridge loan provides short-term financing to bridge the gap between the purchase of a new home and the sale of the old home.

Getting a bridge loan may enable you to buy your dream home even if you haven’t sold your current house yet. However, bridge loans are not for everyone. They come with higher interest rates and fees compared to conventional mortgages.

Here is a step-by-step guide on how to get a bridge loan

What is a Bridge Loan?

A bridge loan, as the name suggests, “bridges the gap” between two financial events. It provides short-term financing, usually for a period of 6 months to 1 year, to borrowers who need money to make the downpayment on a new house but can’t access the funds from the sale of their existing home right away.

The most common use case for a bridge loan is when you find your perfect home but haven’t sold your current house yet. The bridge loan covers the downpayment on the new home so you can move forward with the purchase. You repay the bridge loan once you sell your old house.

Bridge loans allow you to buy a new house without having to put your original home on the market first or make your new home purchase contingent on selling the existing home. This flexibility and convenience come at a price – bridge loans charge higher interest rates and fees compared to conventional mortgages.

Determine If You Need a Bridge Loan

Before applying for a bridge loan, determine whether you actually need one or if alternative financing options might work better for your situation.

Ask yourself these questions

• Is buying a new home before selling your current one absolutely essential? Can you make the purchase contingent on the sale of your existing home?

• How long do you expect it will take to sell your current home? Is it likely to sell within 2-3 months?

• Will you be able to make mortgage payments on both homes while waiting for your current home to sell?

• Do you have at least 20% equity built up in your current home? Most lenders require this for a bridge loan.

• How much savings do you have on hand? Could you cover at least three months of both mortgage payments yourself if needed?

If you don’t have a compelling need to buy right away or sufficient equity and savings, a bridge loan may not be the best option. You can consider lower-cost alternatives like home equity loans or lines of credit.

Understand Bridge Loan Requirements

Bridge loan requirements are similar to conventional mortgage requirements but a bit stricter. Here are some typical eligibility criteria:

• Credit score: 720 or higher

• Debt-to-income ratio: below 50%

• Loan-to-value ratio: up to 80% LTV but at least 20% equity in current home

• Income and assets: stable income and healthy savings

• Property appraisal: the property must appraise for loan approval

Meeting the minimum requirements doesn’t guarantee approval. The lender will evaluate your overall financial picture. A strong credit history and ample liquid reserves improve your chances.

Calculate Costs

The biggest downside of a bridge loan is the high cost. Expect to pay:

• Interest rate: 2-3% higher than conventional mortgage rates

• Origination fee: up to 2% of the loan amount

• Other fees: application fee, processing fee, appraisal fee etc.

• Prepayment penalties: some lenders charge this if you pay off the loan early

Work out precise costs based on your loan amount and terms. Account for the total fees at closing and the total interest paid over the life of the loan. Compare costs against alternative forms of financing.

Shop Around with Lenders

Shopping around with multiple lenders is crucial to get the best bridge loan deal. Rates, fees, and qualifications can vary significantly from one lender to the next.

Start with large national lenders and banks you already have a relationship with. Local community banks and credit unions are also good options. Compare interest rates, origination fees, and prepayment policies. Ask about discounts you may qualify for.

Get pre-approved with 2-3 lenders first before formally applying. Pre-approval lets you confirm you qualify and compare real loan estimates side-by-side.

Formally Apply with a Lender

Once you pre-qualify with a few lenders and compare options, you can go ahead and formally apply with your lender of choice. Here’s a high-level overview of the application process:

1. Complete a loan application with your personal and financial details. Provide supporting documents like bank statements, tax returns, etc.

2. Allow the lender to check your credit report and score.

3. Get the new home appraised by the lender’s approved appraiser.

4. Submit verification of employment and income.

5. Provide preliminary title work and home insurance info on your current home that will serve as collateral.

6. Review and accept the final loan estimate if you wish to move forward.

7. Once approved, work with the lender on establishing an interest rate lock, scheduling inspections, and coordinating closing.

The entire application process usually completes within 2-3 weeks if you provide documents promptly. Rushed closings are possible for an additional fee.

Close on Time

When you finally reach closing day for your bridge loan, carefully review all documents before signing. Re-confirm the interest rate, fees, payment dates, and repayment terms. Ensure there are no surprises or changes from your initial loan estimate.

Schedule your bridge loan closing before or concurrent with the closing on your new home purchase. Avoid gaps between the two events. Communicate closing timelines clearly with your real estate agent, attorney, and all parties involved.

Coordinating the two transactions neatly is key to ensuring you get the temporary financing you need, when you need it.

Repay the Loan

Once you secure your new home, the priority becomes selling your current home so you can repay the bridge loan entirely.

• List your home for sale immediately if you haven’t already.

• Price it competitively and be flexible on offers. Avoid overpricing.

• If needed, take additional steps like staging your home to make it more marketable.

• Discuss marketing strategies with your real estate agent to generate buyer traffic.

• Plan for the contingency that your home may take longer to sell than expected.

• Pay off your bridge loan in full immediately upon the sale closing of your existing home.

• Try to time the sale so you can repay the loan before the final end term maturity date.

With preparation and diligence, you can get a bridge loan, buy your perfect home, sell your existing home, and repay the short-term financing within a year or less. Just be thorough at every step of the process and keep a sharp eye on costs and timelines.

Alternatives to Bridge Loans

Though bridge loans provide a solution for buying before selling, they aren’t the only option. Two alternatives to consider are:

Home Equity Loan

You can take out a home equity loan or home equity line of credit (HELOC) against your current home to get funds to put toward a down payment on a new home. Home equity loans charge lower interest rates than bridge loans and give you longer repayment timeframes.

Contingent Purchase Offer

Making your new home purchase contingent on the sale of your existing home removes the need for a bridge loan entirely. This option gives you more flexibility if your home sells slower than expected. Just be aware contingent offers may be less attractive to sellers.

Weigh the pros and cons of all options carefully before deciding if a bridge loan is the right fit for your situation. With the right planning, you can make your dream home a reality even if the timing of buying and selling isn’t perfect.