A bridge loan is used in real estate transactions to bridge the financial gap between the sale of the borrower’s current home and the purchase of the borrower’s next home. The maximum amount that can be borrowed on a bridge loan is dependent primarily on the value of these two homes.
Lenders set their own standards for the maximum amount that they will lend on a bridge loan. A common standard is 80 percent of the total value of the home you already have. Assume for this example that you own a house worth $200,000 on which you still owe $50,000, and you want to buy a new home worth $300,000. A typical lender would be willing to approve you for a bridge loan of $160,000 ($200,000 x 0.8). The proceeds from the bridge loan can then be used to pay off the $50,000 balance on the first mortgage, leaving you $110,000 to apply toward a down payment on the new home.
Bridge loans are especially popular with homeowners who can’t afford the closing costs on a new mortgage. In this case, you would need a bridge loan to cover closing costs only, rather than the purchase of the house itself.
A bridge loan also can allow you to make an offer without a financing contingency. Financing contingencies are not popular with sellers, because they allow buyers to get their down payment back without penalty in the event they can’t obtain financing. Having to use a contingency can be the difference between your having an offer accepted and having it rejected. To avoid this potential problem, you can take out a bridge loan that is large enough to cover the entire purchase cost of the house. Buyers often use this type of bridge loan to make an offer on a house that the owner wants to sell quickly.
To determine how much you can borrow on a bridge loan, make sure to do enough research and talk to a financial advisor about your options.