How Does a Mortgage Bridge Loan Work for Buying a New Home?

Bridge loans provide a temporary financial solution for homebuyers needing to purchase a new home before selling their current one. This short-term financing is especially valuable in competitive real estate markets, enabling buyers to secure their next home without delays tied to the sale of their existing property.

Eligibility Criteria

To qualify for a mortgage bridge loan, borrowers must meet specific lender requirements focused on financial stability and home equity. Typically, lenders require at least 20% equity in the current property, which serves as collateral. A strong credit score is also essential, reflecting the borrower’s ability to manage debt responsibly.

Debt-to-income ratio is another critical factor, ensuring the borrower can handle the additional financial obligation of a bridge loan alongside existing debts. Lenders may also request a detailed plan for selling the current home, including a realistic timeline and pricing strategy. Some lenders require a listing agreement with a real estate agent to confirm the borrower’s intent to actively market the property.

How the Funds Are Accessed

Accessing funds from a bridge loan begins with an appraisal of the current property to determine its market value. Lenders typically offer between 70% to 80% of the appraised value. Once terms are agreed upon, the loan proceeds are disbursed, often as a lump sum. This allows borrowers to quickly make a down payment on their new property. Funds are usually deposited into the borrower’s account or transferred directly to the seller, depending on the arrangement.

Repayment Structure

Bridge loans have short repayment terms, generally ranging from six months to three years. The repayment is often structured around the expected sale of the borrower’s existing home. Interest rates are higher than those of conventional mortgages, typically between 8% and 12%, reflecting the short-term nature of the loan.

Some lenders offer interest-only payment options during the loan term to ease cash flow until the property is sold. Repayment is usually completed through the sale proceeds or refinancing into a long-term mortgage. Borrowers should review potential penalties for early repayment or extensions when planning their financial strategy.

Relationship Between Old and New Property

The financial connection between the old and new properties is central to a bridge loan. Equity in the current home is leveraged to fund the purchase of the new property. Tax considerations, such as the ability to exclude up to $250,000 ($500,000 for married couples) of capital gains from the sale of a primary residence under IRS regulations, can also play a role. These exclusions may reduce financial obligations, making it easier to repay the bridge loan.

Closing Process

The closing process finalizes the bridge loan and prepares the borrower for their new home purchase. This step involves reviewing and signing all loan documents, which outline the terms, repayment schedule, interest rates, and any associated fees. Borrowers must understand these terms fully, as they define their financial commitments.

At the closing meeting, the borrower signs the necessary documents, and the loan funds are disbursed. These funds are typically used to facilitate the purchase of the new home. A title company or attorney often oversees the closing to ensure compliance with legal and regulatory requirements, minimizing risks or potential disputes.