Buying a new home before selling your current one can be a tricky financial situation. Many homeowners find themselves in a position where they own two properties at the same time, even if only temporarily. In cases like this, bridge financing can help ease the financial strain, allowing for a smoother transition between homes.
In this guide, we’ll explore how bridge financing works, who qualifies for it, and the costs involved. If you’re planning to move but haven’t sold your existing home yet, this could be the solution to managing two mortgages at once.
What Is Bridge Financing?
Bridge financing is a short-term loan that provides temporary funding to homeowners who are buying a new home before selling their current one. The loan “bridges the gap” between the purchase of the new property and the sale of the existing one, covering the down payment and other costs associated with the transition.
Bridge loans typically last between 30 to 120 days, but this varies depending on the lender and your financial situation.
How Does Bridge Financing Work?
- You Buy a New Home Before Selling Your Old One
- You need funds for the down payment and other expenses related to closing on the new property.
- A Lender Provides a Bridge Loan
- This short-term loan covers the cost of the down payment, giving you time to sell your existing home.
- You Sell Your Current Home
- Once your home is sold, you use the proceeds to pay off the bridge loan.
- Your Mortgage Continues as Usual
- After repaying the bridge loan, you continue making regular mortgage payments on the new home.
Who Qualifies for Bridge Financing?
Lenders will typically require:
✔️ A firm sale agreement on your existing home – Some lenders may require a signed offer before approving bridge financing.
✔️ Strong credit history – A good credit score can help secure better terms.
✔️ Sufficient home equity – The amount of equity in your current home determines how much you can borrow.
✔️ Proof of stable income – Lenders want to see that you can handle payments, even temporarily.
If you’re not sure how much you can afford, use our Mortgage Affordability Calculator to get a better sense of your financial situation before applying for bridge financing.
How Much Does Bridge Financing Cost?
The cost of bridge financing varies depending on the lender, the loan amount, and the duration of the loan. Here are some common fees to be aware of:
- Interest Rates: Bridge loan interest rates are usually higher than standard mortgage rates, often ranging from 5% to 12%.
- Lender Fees: Some lenders charge an administration fee, typically $500–$2,000.
- Legal Fees: You may need to pay legal fees to finalize the loan agreement.
- Appraisal Fees: If a lender requires a property appraisal, this can add additional costs.
Pro Tip: Even though bridge loans have higher rates, they are short-term, so the overall interest cost is usually manageable.
Pros and Cons of Bridge Financing
✅ Pros:
✔️ Allows you to buy a new home without selling your current one first.
✔️ Provides financial flexibility for a smooth transition.
✔️ Prevents the need for rushed home sales.
❌ Cons:
❌ Higher interest rates than standard mortgages.
❌ Requires equity in your current home.
❌ Some lenders require a firm sale agreement before approval.
Alternatives to Bridge Financing
If bridge financing isn’t the right fit for you, consider these alternatives:
🔹 Home Equity Line of Credit (HELOC): If you have enough equity, you can use a HELOC to cover the down payment.
🔹 Personal Loan: A short-term loan from your bank could help, though it may have higher rates.
🔹 Contingency Offers: In some cases, you can negotiate a purchase agreement that is conditional on selling your current home first.
Final Thoughts
Bridge financing is a valuable tool for homeowners navigating the complex process of buying and selling a home simultaneously. While it comes with additional costs, it can provide financial flexibility and prevent the stress of rushed decisions.
If you’re considering bridge financing or want to explore other mortgage options, Contact The Local Broker for expert guidance and tailored solutions.
