How a Bridge Loan Can Help You Buy Your Next House

A bridge loan, sometimes called a swing loan, makes it possible to finance a new house before selling your current home. Bridge loans may give you an edge in today’s tight housing market — if you can afford them.

Bridge loans at a glance:

• 20% equity in your current home required.

• Six- to 12-month terms.

• High interest rates and fees.

• Best in areas where homes sell quickly.

What is a bridge loan?

In a perfect world, your current house would be under contract to sell before you made an offer on a new one. Proceeds from the sale provide a down payment for the next house and voilà! You’d move seamlessly from one house — and mortgage — to the next.

But we don’t live in a perfect world.

Bridge loans give you the option to take more time between transactions by letting you access your home equity before you sell,.

And in doing so, bridge loans help you avoid making a contingent offer on the home you want to buy. Sale-contingent offers let you back out of the contract if your current home doesn’t sell, and they make sellers nervous.

In markets where sellers often get multiple offers, those that come with conditions may not be able to compete against offers from buyers who already have the funds.

How bridge loans work

When applying for a bridge loan, expect the same credit and debt-to-income requirements as a mortgage.

Most bridge loan lenders won't go above an 80% loan-to-value ratio, or LTV. So you’ll need to have at least 20% equity in your current home for a bridge loan to be an option.

Bridge loans are generally used in one of two ways:

1. As a way to pay off your current mortgage, putting any excess toward your new down payment.

2. As a second mortgage that becomes your down payment for the new house.

Example 1: Mortgage payoff and down payment

Let’s say your current home value is £300,000 and you owe £200,000 on the mortgage. A bridge loan for 80% of the home’s value, or £240,000, pays off your current loan with £40,000 to spare. If the bridge loan closing costs and fees are £5,000, you’re left with £35,000 to put down on your new house.

Example 2: Second mortgage

Let’s again say your current home value is £300,000. With £200,000 on the mortgage, you have £100,000 in equity. A bridge loan for 80% of your equity would provide £80,000 for you to apply toward the purchase of your next home.

Both scenarios assume your old house sells, allowing you to pay off the bridge loan, plus interest, fairly quickly. If it doesn’t sell in time, you may owe the full amount of the bridge loan on top of your new mortgage payment. This could lead to significant financial stress or even default.

Bridge Loan Pros

• You can make an offer on the house you want without a sale contingency.

• Payments may be interest-only or deferred until you sell.

When to use a bridge loan

If you find yourself in one of these sticky situations, a bridge loan might keep things on track.

• Sellers in your area won’t accept contingent offers.

• You can’t afford a down payment without the proceeds from your current house.

• You’re confident your house will sell but prefer to secure a new home before listing it.

• Closing on your current house is scheduled after the closing date for your new house.