A bridge loan is a short-term loan used to bridge the gap between buying a new home and selling your previous one. It is a form of short-term financing that can serve as a source of funding and capital until a person or company secures permanent financing or removes an existing debt obligation. Bridge loans are typically short-term in nature, lasting on average from 6 months up to 1 year, and are often used in real estate transactions. They can be used to finance the purchase of a new home before selling your existing residence. Bridge loans can be beneficial in a sellers market, where the market is hot and you’re competing with many other buyers, as it can take away any financial contingencies in your offer. Bridge loans are typically used by sellers who find themselves in a tight spot or needing to make a sudden change of locale.

The most common way to use a bridge loan is for closing costs. You can apply for a bridge loan with a lender, and although terms may vary, it’s standard to borrow a maximum of 80 percent of both your home’s value and the value of the home you wish to buy. Bridge loans have relatively high interest rates and are usually backed by some form of collateral, such as real estate or the inventory of a business.

Bridge loans can be a good alternative to a cash-out refinance, which doesn’t allow you to borrow against your current home’s equity if it’s listed for sale. Bridge loans also help with the balancing act of buying and selling a house at the same time. Applying for a bridge loan is similar to applying for a regular mortgage in that several factors are used to evaluate your creditworthiness, such as your credit score and debt-to-income (DTI) ratio. Most lenders only allow you to borrow up to 80 percent of your current home’s equity.

In summary, a bridge loan is a short-term loan that can help you finance the purchase of a new home before selling your existing residence. It is typically used in real estate transactions and can be beneficial in a sellers market. Bridge loans have relatively high interest rates and are usually backed by some form of collateral. Applying for a bridge loan is similar to applying for a regular mortgage, and most lenders only allow you to borrow up to 80 percent of your current home’s equity.