A bridge loan is a short-term financing option designed to provide immediate cash flow until permanent financing is secured or an existing obligation is settled. These loans help borrowers address current financial needs quickly and are typically secured with collateral, such as real estate or business inventory. Due to their short-term nature, bridge loans generally come with higher interest rates. Commonly used in real estate, they are also referred to as bridge financing or bridging loans.
A bridge loan serves as a valuable source of temporary funding for parties awaiting a contingency but wishing to proceed with a purchase before the contingency is met. A common scenario is when a residential buyer identifies a new home they wish to purchase and either makes a contingent offer—dependent on the sale of their current home—or desires to make an offer on the new home before selling their existing property. The bridge loan helps bridge the gap between the sale of one property and the purchase of another.
In a competitive seller’s market, sellers may be reluctant to wait for a buyer's current home to sell. In such cases, the buyer may opt to make a non-contingent offer. However, this often presents a challenge, as the buyer typically relies on the proceeds from the sale of their existing home to fund the down payment for the new property. A bridge loan allows the buyer to remain competitive, providing the necessary funds to secure the new home while their down payment is still tied up in the sale of their current property.
Bridge loan lenders typically offer greater underwriting flexibility, allowing borrowers to secure financing with credit scores as low as 500, while other lenders may require scores in the high 600s. In terms of debt-to-income (DTI) ratios, some bridge loan lenders may accept ratios as high as 50%. The key factor in securing short-term bridge financing is the borrower’s equity position.
Many lenders are willing to offer up to 75% of the current value of the property being sold. Given the short-term nature of these loans, investors prioritize ensuring that borrowers have a clear and feasible plan for obtaining permanent financing.
