Understanding Bridge Loans: A Complete Guide for 2025
Buying a new home before selling your current one can be a financial tightrope walk. You need equity from the first home to fund the down payment on the second, but that equity is trapped until you sell. Enter the bridge loan.
A bridge loan (closely related to "hard money" or "gap financing") is a short-term loan designed to bridge the gap between two transactions. It allows you to tap into your current home's equity immediately, giving you the cash needed to close on your new dream home without waiting for your old one to sell.
While convenient, bridge loans come with higher interest rates and unique costs. Our Bridge Loan Calculator helps you crunch the numbers to see if this financing strategy is affordable for your situation.
How Bridge Loans Work
A bridge loan is typically an interest-only loan with a term of 6 to 12 months. Here is the standard mechanics:
- The Loan Amount: Lenders usually let you borrow up to 80% of the combined value of your two homes.
- Monthly Payments: You pay only the interest each month. There is no principal reduction.
- The Balloon Payment: When the term ends (or when your old home sells), the entire loan balance is due in one lump sum.
When Should You Use a Bridge Loan?
Bridge loans are not for everyone. They are best suited for specific high-stakes real estate scenarios:
- Hot Markets: You found your "forever home" in a competitive market and cannot risk making an offer contingent on selling your current house.
- Timing Misalignments: Your new job starts in a different state next month, but your current house needs repairs before listing.
- Down Payment Cash Flow: You have plenty of equity but very little liquid cash for a 20% down payment.
Key Costs to Watch Out For
Because these loans are short-term and higher risk for lenders, they carry premium price tags. Use our calculator to account for these specific costs:
- Interest Rates: Typically 2% to 4% higher than standard 30-year mortgage rates.
- Origination Fees: This is a major cost, often ranging from 1.5% to 3% of the loan amount. On a $200,000 loan, a 2% fee is $4,000 upfront.
- Closing Costs: Appraisal fees, title insurance, and legal fees still apply, even for a 6-month loan.
Pro Tip: The "Recast" Strategy
Once your old home sells and you pay off the bridge loan, you might be left with a large chunk of profit. You can often put this lump sum toward your new mortgage and ask your lender to "recast" your loan. This lowers your monthly payments without the cost of refinancing.
Alternative Financing Options
Before committing to a bridge loan, consider these alternatives which might be cheaper:
- HELOC (Home Equity Line of Credit): If you open one before listing your home, you can draw funds for a down payment. Rates are variable but closing costs are often lower. See our HELOC Calculator.
- 401(k) Loan: Borrowing against your retirement is risky, but you pay the interest back to yourself. Calculate the cost with our 401(k) Loan Calculator.
- Sale Contingency: In a slower market, sellers may accept an offer contingent on you selling your current home.
Bridge Loan Qualification Criteria In-Depth
Unlike standard Fannie Mae mortgages, bridge loans are often "asset-based." This means lenders care more about the equity in your property than your debt-to-income (DTI) ratio.
Equity Requirements
You typically need at least 20-30% equity in your current home. Lenders will calculate a combined Loan-to-Value (CLTV) across both properties, usually capped at 70-75%.
Exit Strategy
The lender needs to know exactly how you will pay them back. A signed listing agreement for your current home is often required as proof of intent to sell.
Exit Strategies: What If Your Home Doesn't Sell?
The nightmare scenario for any bridge loan borrower is the loan expiring before the old home sells. Here is how to protect yourself:
- Negotiate an Extension Option: Ask for a clause that allows you to extend the loan for another 6 months (usually for an additional fee).
- Price Aggressively: If you are using a bridge loan, you cannot afford to "test the market" with a high listing price. Price your home to sell quickly.
- Have a Refinance Backup: If the term ends, be prepared to refinance the bridge loan into a conventional investment property loan, though this will likely come with higher rates.
Cost Analysis: Bridge vs. HELOC
Let's compare a $100,000 drawdown for a down payment:
| Feature | Bridge Loan | HELOC |
|---|---|---|
| Interest Rate | Higher (10% - 12%+) | Moderate (Prime + Margin) |
| Closing Costs | High (2-3% of loan) | Low or Zero |
| Speed | Fast (2-3 weeks) | Slow (30-45 days) |
| Availability | Available even if home is listed | Frozen if home is listed |
Crucial Detail: Most banks will freeze your HELOC or deny a new application if they know your home is for sale. This is why bridge loans exist—they are designed specifically for properties on the market.
Buying "Non-Contingent": The Ultimate Edge
In a "Seller's Market"—where there are more buyers than homes—sellers hold all the cards. They often refuse to even look at offers that are "contingent on the sale of another property."
This is where a bridge loan becomes a strategic weapon, not just a financial tool. By securing bridge financing, you can submit a non-contingent offer. To the seller, you look like a cash buyer or a standard mortgage buyer. You close on their timeline, not when your old house sells.
The Risk Factor
The danger, of course, is carrying two mortgages at once. You must have the cash reserves to pay the mortgage on your old home, the mortgage on your new home, AND the interest on the bridge loan simultaneously. Lenders usually require seeing 6 months of reserves in the bank to approve this.
Bridge Loan Limits by Region (2025 Estimates)
Bridge loans are often "Portfolio Loans," meaning banks keep them on their own books rather than selling them to Wall Street. This gives them flexibility, but limits also vary wildly.
| Region | Typical Limit | Max LTV |
|---|---|---|
| National Average | $250k - $500k | 80% |
| Bay Area / NYC | $1.5M - $3M | 65% - 70% |
| Texas / Florida | $500k - $1M | 75% |
The "Cross-Collateralization" Clause
Be aware of this legal term. With a bridge loan, the lender places a lien on both your properties: the one you are selling and the one you are buying.
This protects the lender but limits your flexibility. If you wanted to take out a HELOC on your new home immediately for renovations, you likely couldn't because the bridge lender sits in the "second lien" position (behind your first mortgage) or even the first position, blocking other financing until they are paid off.
Frequently Asked Questions
What is the typical interest rate for a bridge loan in 2025?
Expect rates between 10% and 12%, or roughly 2% to 4% higher than prevailing 30-year fixed mortgage rates. They are priced as short-term, higher-risk products.
Can I get a bridge loan with bad credit?
It is possible but difficult. Since these are asset-based loans, lenders care more about your home equity (usually requiring 30%+) than your credit score, but scores below 620 will struggle to find financing.
How long does it take to get a bridge loan?
They are faster than conventional mortgages, often closing in 2-3 weeks since there is less underwriting of your personal income.
What happens if my home doesn't sell in time?
You face a balloon payment. Most lenders will offer a 3-6 month extension for a fee (e.g., 1% of the loan amount). If you still can't sell, you may need to lower your price aggressively or refinance into a longer-term investment loan.
Does a bridge loan replace a down payment?
Functionally, yes. It extracts equity from your old home to use as the cash down payment for the new one, allowing you to avoid a "contingent" offer.