Understanding the Pros and Cons of Bridge Loans for Real Estate Transactions

When buying or selling a home, timing can create major challenges. What happens if you want to buy a new property but haven’t sold your current one yet? Or if you need funds quickly to close on a new home? Bridge loans offer a solution for these situations, but they come with both advantages and risks. Understanding the pros and cons of bridge loans can help you decide if this short-term financing option fits your real estate goals.

Bridge loan helps homeowners buy new property before selling current one

What Is a Bridge Loan?

A bridge loan is a short-term loan designed to provide immediate cash flow during a real estate transaction. It “bridges” the gap between buying a new home and selling an existing one. Typically, these loans last from six months to a year and are secured by your current home or the new property.

For example, if you find your dream home but haven’t sold your current house, a bridge loan can give you the funds to make a down payment or even cover the full purchase price. Once your original home sells, you repay the loan.

The Pros Vs Cons of Bridge Loans

Advantages of Bridge Loans

Quick Access to Funds

Bridge loans provide fast financing, often approved within days or weeks. This speed can be crucial in competitive housing markets where delays mean losing out on a property.

Flexibility in Timing

You don’t have to wait for your current home to sell before buying a new one. This flexibility allows you to move on your schedule and avoid temporary housing or storage costs.

Avoid Contingencies in Offers

Buyers who use bridge loans can make offers without sale contingencies. Sellers often prefer these offers because they reduce the risk of the deal falling through.

Maintain Buying Power

If you have equity in your current home, a bridge loan lets you tap into that value without waiting for the sale. This can help you afford a better property or negotiate more confidently.

Disadvantages of Bridge Loans

Higher Interest Rates and Fees

Bridge loans usually carry higher interest rates than traditional mortgages. Lenders charge more because these loans are riskier and short-term. Additionally, fees for origination, appraisal, and closing can add up.

Risk of Carrying Two Mortgages

If your current home doesn’t sell quickly, you may end up paying two mortgages at once. This can strain your finances and increase the risk of default.

Short Repayment Period

Bridge loans require repayment within a limited time, often six to twelve months. If your home sale is delayed, you might face penalties or have to refinance under less favorable terms.

Qualification Challenges

Lenders often require strong credit, significant equity, and proof of income to approve a bridge loan. Not everyone qualifies, especially if the housing market is slow.

Calculating costs and risks involved in bridge loans

When Does a Bridge Loan Make Sense?

Bridge loans work best when you have a clear plan and strong financial footing. Consider these scenarios:

• You have a high chance of selling your current home quickly based on market conditions or a recent appraisal.

• You want to avoid losing a new property due to timing conflicts.

• You have enough savings or income to cover payments if your home sale takes longer than expected.

• You want to make a competitive offer without sale contingencies.

  
  

Alternatives to Bridge Loans

If a bridge loan seems risky or expensive, other options might work:

• Home Equity Line of Credit (HELOC): Borrow against your current home’s equity with lower interest rates but flexible repayment.

• Contingent Offers: Make an offer on a new home contingent on selling your current one, though this may weaken your negotiating position.

• Savings or Personal Loans: Use personal funds or loans, but these may have limits or higher costs.

• Renting Temporarily: Sell your home first, then rent while searching for a new property.

  
  

Tips for Using Bridge Loans Wisely

• Get Pre-Approved: Understand your borrowing limits and costs before making offers.

• Plan for Delays: Have a backup plan if your home sale takes longer than expected.

• Calculate Total Costs: Include interest, fees, and potential double mortgage payments in your budget.

• Consult a Financial Advisor: Get personalized advice based on your situation.

  
  

Reviewing financial plans before taking a bridge loan

Jonathan Shupe Branch Manager

Jonathan Shupe NMLS ID# 1649211 is Manager of Shupe Lending Group NMLS ID# 2478065. Jonathan Shupe and his team of loan officers are licensed in multiple states. Many of the borrowers of Shupe Lending Group are individuals who did not qualify at other lenders due to those lenders overlays on government and conventional loans. We have a reputation of being able to work with over 270 different lenders to be able to offer our clients dozens of non-QM and alternative financing loan programs. Any non-QM mortgage loan program available in the market will be offered by our team at Shupe Lending Group. Our team is available 7 days a week, evenings, weekends, and holidays.