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What’s the Deal with Bridge Financing Loans?

Sometimes, when selling your current home and buying a new one, the closing dates don’t align. For instance, you might take possession of your new home on July 5th, but your current home doesn't close until July 25th. How do you pay for the new home if you don’t have the proceeds from the sale yet? Enter bridge financing.

What is Bridge Financing?
Bridge financing is a temporary loan that helps you manage the gap when your purchase closes before your sale. It allows you to borrow against the equity of your current home before you actually receive the money from its sale.

How Does Bridge Financing Work?
To qualify for bridge financing, you must have a firm sale of your current property at least five business days before your new purchase closes. A "firm" sale means there are no remaining conditions—such as appraisal, financing, or inspection—everything is finalized. Lenders can't lend against your equity if there are still conditions on your sale because they can't ensure the sale will go through.

It’s also wise to have closing costs saved up, as some lenders require a cash float after the sale to approve bridging funds.

How Much Bridge Financing Can I Get?
The typical formula for calculating a bridge loan is:

Down Payment minus Deposit (submitted with your offer) = Bridge Loan Amount

Ensure you know how much you'll net from your sale after expenses. Lenders usually estimate high closing costs (around 5-7% for legal fees). Bridge loans are typically available for up to 60 days.

How Much Does a Bridge Loan Cost?
The cost of a bridge loan depends on the amount borrowed. Interest rates are usually Prime + 3-4%, plus potential set-up and legal fees. For example, a $100,000 bridge loan for 20 days costs around $18.85 per day or $667.12 for the 20 days. Some lenders may also charge legal fees if the loan amount exceeds $150,000.

Should I Get a Bridge Loan?
If possible, avoid bridge loans by saving enough for your down payment or coordinating your sale and purchase dates. Bridge loans come with risks and costs, including the possibility of not having enough money to close on your new home. This is a nightmare scenario to avoid.

However, if you do need a bridge loan, most prime lenders offer them. Be cautious with alternative lenders, as they charge much higher rates and fees. Consult with a mortgage expert before deciding when to sell and buy your property to ensure you make the best decision.