Bridge loans: Everything you need to know

This article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer bridge loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.

Quick insights

• Bridge loans are short term loans that can be used to bridge the gap between buying a new home and selling your previous home.
• Bridge loans can be acquired in less time than mortgage loans but aren’t offered by banks or credit unions, they’re usually only offered by specialized lenders.
• A bridge loan can be useful in specific circumstances but aren’t well suited for home purchases.

Thinking about selling your home while planning your next move or buying an investment property? Doing both of these steps at once can be a delicate balance and may cause financial strain — especially if you, like many homebuyers, are planning to use the profit from selling your current home to buy your new one. Thankfully, a bridge loan can help ease your homebuying journey.

What is a bridge loan?

A bridge loan is a short-term loan used to bridge the gap between buying a home and selling your previous one. For example, if you want to buy before you sell, you won’t have the profit from the sale to apply to your new home’s down payment. This can be a challenge if you were depending on that money to buy your new home. Instead, you can use the lump sum from the bridge loan to cover the down payment and closing costs on your new home. Then, once your previous home is sold, you can pay back the bridge loan and continue making payments on the new mortgage.

How does a bridge loan work?

Bridge loans may be offered by a variety of financial institutions. However, not all banks provide this type of financing, so it’s important to check with individual institutions. Some companies specialize in bridge loans. While these companies can provide you with a loan in less time, there are fewer consumer protections and regulations than you would find with a traditional mortgage lender.

While the terms for a bridge loan will vary depending on the lending institution, the following are some of the key characteristics:

• Application period: While the timeline to buy a home with a mortgage loan can vary by lender and situation, it usually takes about 30–45 days for final approval. Meanwhile, bridge loans can often be made available within 72 hours.bridge-loan-cnbc-december-2024
• Duration: Bridge loan terms tend to run from six months to three years.bridge-loan-cnbc-december-2024
• Payments: Depending on your lender, a bridge loan may have monthly payments, interest-only payments or end with a balloon payment. 
• Borrowing limits: Although limits may vary, it’s standard to borrow a maximum of 80%–85% of your home’s value.bridge-loan-cnbc-december-2024

When does it make sense to use a bridge loan?

Bridge loans aren’t recommended for most home purchases. Instead, they’re usually used in one of two situations.

Buying a new home before you sell your old one

If you want to buy a new home before you sell your current one, you may find that you don’t have the funds to cover your down payment and closing costs. Taking out a bridge loan on your current home can help you make a down payment and cover these costs until you’re able to sell your home.

Buying an investment property

Another reason to use a bridge loan is to purchase a property you intend to renovate and then resell for a profit. This is often referred to as flipping a property. With a bridge loan, you can borrow against the value of your current home and use the proceeds to buy or make a down payment on an investment property. Assuming you resell the property at a profit, you can use the proceeds to pay back the loan.

What do you need to qualify for a bridge loan?

To qualify for a bridge loan, your lender will look at standard credentials like your debt-to-income (DTI) ratio, how much home equity you have, your credit score and possibly your household income. It helps if you’ve been a good mortgage candidate with your first home.

If you don't have a decent amount of equity in your current home, it may be hard to qualify. If your lender determines you're an ideal candidate, you may experience a faster approval process for a bridge loan than you did for a traditional mortgage.

How to repay a bridge loan

The loan typically lasts about six months to a few years, with a final larger payment called a balloon payment at the end of the termbridge-loan-cnbc-december-2024. It’s beneficial to structure the sale of your previous home so you can use the money to repay your bridge loan as soon as possible.

There’s usually a final due date for the balloon payment—when the loan needs to be paid back in its entirety. It’s important to work out the terms of repayment with your lender and ensure you’re clear on the steps going forward.

What are the pros and cons of bridge loans?

There are some clear advantages to using a bridge loan. However, it can also come with additional costs and risks you need to consider.

Pros of bridge loans

• Beneficial in a seller's market: If the market is hot and you’re competing with many other buyers, your application could be seen as more competitive with a bridge loan. A bridge loan can mitigate any mortgage contingencies in your offer. This is desirable to a seller because it’s a better guarantee that the deal will go through.
• No private mortgage insurance (PMI) requirement: You can avoid PMI on a conventional loan by putting down 20% or more of your down payment using the bridge loan. If you don't put down 20%, PMI is required and raises your mortgage payments.
• Quick financing: It can be faster to qualify for a bridge loan, so you don’t have to worry about selling your current home before buying your next one.

Cons of bridge loans

• Higher interest rates: Since bridge loans are short-term solutions, the lender needs to charge higher rates. These higher rates make lending the money worthwhile for the lender.
• Higher long-term costs: A bridge loan is a financial resource that may be worthwhile or necessary in the moment, but remember the interest and various fees you pay is money out of pocket that you won’t be getting back.
• Two mortgage fees: Once the bridge loan closes, you’ll start paying it back in addition to your mortgage.
• Harder to qualify: Bridge loans can be hard to qualify for if your finances don’t meet lender requirements.

Alternatives to bridge loans

If you’re looking to take money out of an existing piece of real estate, there are alternatives to bridge loans.

Cash-out refinance

A cash-out refinance allows you to borrow against the existing equity in your home by taking out a new mortgage and borrowing more than your current mortgage balance. With a cash-out refinance, you’d need to make regular monthly payments, but you could potentially repay the loan when you sell your house.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) lets you borrow against the available equity in your home. Most lenders will also limit the amount you can borrow to 80% of your home’s appraised value, so you’d be limited in the amount you can borrow if you don’t have enough available equity.

In summary

Applying for a bridge loan may be beneficial depending on your financial situation and where you are in the buying and selling process. But make sure to weigh your options and consider alternatives. If homeowners want to take advantage of their existing home equity, a cash-out refinance may be another option with similar benefits with potentially lower risks.

Apply for a cash-out refinance today to find out how much you can qualify for, and talk to a Home Lending Advisor to learn more about available options. 

Bridge loan FAQs

Is it a good idea to get a bridge loan?

While bridge loans can be effective for short-term real estate purchases or to cover the time between buying a home and selling a home, it may not be the best option if you’re looking to make a long-term real estate purchase.

What is the credit score for a bridge loan?

According to Experian, the minimum credit score for a bridge loan is 700. However, that may vary by lender.bridge-loan-experian-november-2023bridge-loan-experian-november-2023

What is the difference between a bridge loan and a mortgage?

A mortgage loan helps you buy and pay for a home over a long time. You make monthly payments that cover both the loan and interest, and the length of the loan is usually 10 to 30 years.

On the other hand, a bridge loan is a short-term loan that helps buyers cover a down payment on a new home without first selling their house. Bridge loans typically only last six months to three years and end the repayment period with a balloon payment.bridge-loan-cnbc-december-2024bridge-loan-cnbc-december-2024