Bridge loans, which are sometimes referred to as “swing loans,” make it possible to finance a new house while you’re still selling your current property. If you can afford to obtain one, then it is an easy way to gain an edge in a tight housing market. That means your financial situation can adapt to what your living circumstances need to be without much difficulty.
Your current house would be under contract to sell before making an offer on a new one in a perfect world. Then the proceeds from the sale provide you with the down payment you need for the next property. That gives you the ability to move seamlessly from your current home and mortgage to the next one.
It doesn’t take long to realize that we don’t live in a perfect world. Bridge loans give you a way to access the equity in your before selling, making it possible to avoid a contingent offer on the next property you want to buy. Sellers become nervous under those circumstances because you get the option to back out if the stipulation isn’t met.
If you are trying to buy and sell in today’s housing market, then you’ll want to review the pros and cons of bridge loans to see if one is right for you.
List of the Pros of a Bridge Loan
1. It gives you an opportunity to purchase a home without restrictions.
Sellers will require that a buyer sell their first property before signing any paperwork on a second one. The seller doesn’t want to risk the borrower not having enough money for a down payment, causing the deal to fall through because there isn’t enough financing available to close the transaction. When you have access to a bridge loan, then you can solve this problem because the cost covers the amount of the down payment.
2. You may not need to go through a credit check to obtain a bridge loan.
Obtaining a bridge loan isn’t always the same process as getting another lending product in this area. Although there are some lenders who do require tax returns, an acceptable debt-to-income ratio, and a high credit score, not everyone requires all of this information with these specific situations. Some will assume that if you qualified for a home loan, then you will also qualify to receive a bridge loan.
3. You won’t need to worry about making a monthly payment.
Bridge loans don’t usually request repayment terms to start for a few months after securing the funds. That makes the moving process easier for most homeowners since it eliminates the worries of making two payments and managing moving expenses at the same time. You have time to sell your home, paying off the loan before anything becomes due. Most lenders won’t even have interest payments accrue during this time if you can pay back the money right away.
As long as you can manage the upfront fees with your bridge loan, then you can take advantage of the benefits that this product offers.
4. A bridge loan helps you to secure a property in a tight market.
Some housing markets are so tight that sellers don’t need to accept contingent offers to have someone be interested in their property. Waiting for your home to sell first could mean that you end up losing out on the dream house you’ve always wanted. When you have a bridge loan available that can help you to secure the down payment for your next mortgage, then you can make an offer without contingencies so that an opportunity doesn’t get missed.
Sellers are often interested in making a quick sale. By having the money available to secure financing right away, then you might find someone willing to give you a better deal since you won’t force them to wait for additional contingencies.
5. You can start local to find a bridge loan lender.
Instead of running a Google search to find bridge loan lenders, you can work with a local bank or credit union for this product. It might take a little more time to secure what you need by going in this direction, but you’ll also be working with trustworthy people who have a verifiable reputation with references that you can check. The fees are typically lower when you go in this direction, sometimes by as much as 50% less.
There will always be collateral-based hard-money lenders who advertise the fact that they will give you cash in 24 hours. These providers might offer a bridge loan that you can use, but the interest rates they charge are going to be even higher than what you find locally. Unless you work with a well-known brand like Capital One or Bank of America, it may not even be a reputable service.
6. You might have the option to make interest-only payments.
If you do need to make monthly payments on your mortgage, then some lenders will provide you with an interest-only setup. That means you only need to pay the interest each month on the lending product until your home sells. Then you can pay off the entire debt at once when the lump-sum of cash comes in after closing. When you don’t receive a deferment until after you sell, this advantage is the next best option that you will achieve.
7. It reduces the waiting time needed to get approved for the lending.
Qualifying for a bridge loan takes a lot less time than it does for a traditional lending product. That means you get the convenience of closing on your new home while waiting for the best offer on your current one. Instead of being forced to rent an apartment during this process or staying in a hotel while you store your belongings, you can transition right away into the new property.
The cost of the loan is going to take away some of the profits from your previous house, but the convenience of the transition is often worth the effort.
List of the Cons of a Bridge Loan
1. Bridge loans are not a cheap option to consider.
You will pay a higher interest rate and an APR when you decide to use a bridge loan to get into the next property. There are considerable fees to budget for when using this option as well. It is up to you to pay for the appraisal, along with whatever closing costs apply to the loan itself. MarketWatch notes that you can expect to pay about $2,200 in fees to secure a $10,000 loan when considering appraisal, administration, and title costs. The interest rate is typically double what you would pay for a mortgage, and then some lenders use a variable APR on the lending product as a way to further reduce risk.
2. Lenders will determine if you qualify for a second mortgage.
Bridge loan lenders will use the opportunity to review your financial situation to see if you would qualify for a second mortgage. If the provider doesn’t believe that you could pay the bridge loan and another house payment while your first property tries to sell, then you probably won’t qualify for this lending product. The consumers that will have the easiest time using this product will have significant equity in their home, a healthy savings account, and stable income streams.
Even if you do qualify for this product, that means you’re in a position where you must pay two mortgages (not a first and a second on a single property), and that is what disqualifies most borrowers from this lending product.
3. You have LTV limits to consider with a bridge loan.
When you decide that a bridge loan is the best way to get into a new property, then you need to know that you’re limited to 80% LTV. That means you must have more than 20% equity in your existing property to create enough cash for the house you want. If you don’t have enough, then you won’t qualify for the loan even if the lender decides that your credit and income could support payments on two separate mortgages for some time.
This disadvantage can also limit home buyers in some markets if the value of their property is not very high. Having 25% equity in a home worth $50,000 is a very different figure than someone having the same amount in a property valued at $300,000.
4. Bridge loans are more expensive than other lending options.
If you don’t qualify for a bridge loan, then it might be a blessing in disguise. It can be a risky proposition for some homeowners, and the expenses can be a little too much to manage for the value provided. There are alternatives, such as an 8-10-10 loan or a HELOC, that allow you to fit into a new property with less risk.
If you go after a HELOC, then you can make improvements to your current property if the house doesn’t sell to give it some improvements. You need to take action in advance since a home equity line of credit will not get issues on a property for sale. The 80-10-10 option can help you to avoid private mortgage insurance by taking a 10% second mortgage and making a 10% down payment. Then you can pay off the second mortgage when your first house sells.
5. You have limited long-term options with a bridge loan.
Most bridge loans need to be repaid in 12 months or less. If your house doesn’t sell as expected, then you’re going to be on the hook for the entire amount. Some lenders might offer deferment or interest-only payments, but there are limits to their generosity. Almost all of them have a balloon payment at the end of the loan where the entire amount becomes due by a specific date.
If you need more than a year to manage your finances during a housing transition, then a different lending product is your best option. You’ll want to look for one that doesn’t require a significant ending payment or has high fees that you can barely afford.
6. Bridge loans are often structured with a property as collateral.
If you were to default on a bridge loan for some reason, then the lender could foreclose on the property that was used as collateral for the money. That means you’d be stuck in a worse financial position than before, and you could potentially lose the right to sell your first property until you take care of this debt obligation. You might also have a lender insist that your next mortgage be with them if they offer you this lending product, limiting the ability to compare rates across several different firms.
You can encounter this disadvantage if you can’t make the balloon payment at the end of the loan, even if you made every other payment.
Two mortgages and interest payments on a bridge loan can get very expensive. If your home doesn’t sell as quickly as you anticipate, then you’re going to be stuck with a lot of expenses that can add up quickly. You should ensure that your home can sell before pursuing this lending product. Many homeowners find themselves accepting a lower offer than they want because they used this loan and need to get out of it.
The pros and cons of bridge loans show that it can be an excellent choice to pursue in some specific situations. You must evaluate the fees to determine how quickly you think you can sell your current property. If you have enough money in savings for the next down payment and can afford two mortgages for a few months, then you might not need this product.
If you do need a little extra cash and you have enough equity, tapping into it with a bridge loan does make sense if that’s what it takes to get into your dream house.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.