MortgagesLetter B

Bridge Loan (Swing Financing)

A short-term interim loan secured by a homeowner’s existing property that unlocks trapped equity to fund the down payment on a new home before the current property sells.

Overview & Practical Application

A Bridge Loan (also known as Swing Financing or Gap Financing) is a short-term real estate loan (typically structured for 6 to 12 months) designed to solve the timing mismatch when a homeowner wants to purchase and close on a new residence before their existing home has sold.

By tapping the equity in the departing residence, a bridge loan allows the buyer to submit a non-contingent purchase offer on their next home — a decisive competitive advantage in tight housing markets.

Bridge loans are structured in one of two ways: 1. Second-Lien Bridge Loan: Sits behind the existing first mortgage on the departing home and advances cash solely for the new home’s down payment. 2. First-Lien Wrap Bridge Loan: Pays off the existing first mortgage on the departing home *and* advances the cash down payment for the new home, often with interest payments deferred until the departing home closes escrow.

Mathematical Formula & Calculation

Maximum Bridge Advance = (Departing Home Value * Max Bridge CLTV %) - Existing First Mortgage Payoff

Calculates the maximum net equity cash advance a bridge lender will extend against the departing residence (typically capped at 75% to 80% CLTV).

Variable Definitions:

  • Departing Home Value=Appraised market value of the current residence being listed for sale
  • Max Bridge CLTV %=Lender combined loan-to-value ceiling (commonly 75% or 80%)
  • Existing First Mortgage Payoff=Payoff balance of the current mortgage on the departing home

Real-World Underwriting Example

Scenario: Your current home is worth $600,000 with a $250,000 mortgage balance. A bridge lender allows up to 75% CLTV.

Calculation:
Max Total Debt (75% of $600,000) = $450,000.
Maximum Bridge Cash Advance = $450,000 - $250,000 = $200,000.

Takeaway: You can unlock up to $200,000 immediately to use as the 20% down payment on a $1,000,000 new home before your old home sells.

Key Underwriting Takeaways

  • Eliminates the need for a "Home Sale Contingency" when bidding on a new property.
  • Carries higher interest rates (often 8.5% to 11.5%) and origination fees (1% to 2%) due to its short 6-to-12-month duration.
  • An alternative for buyers who already have sufficient minimum down payment cash is buying with 5%–10% down and executing a Mortgage Recast after the old home sells.
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Personal Finance

Home Equity

The net market value of a homeowner’s unencumbered interest in their real property, calculated as market value minus outstanding debt.

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MortgagesLTV

Loan-to-Value Ratio (LTV)

An assessment of lending risk calculated by dividing the loan amount by the appraised property value or purchase price.

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Mortgages

Mortgage Recast (Re-Amortization)

A loan modification procedure where a homeowner makes a lump-sum principal payment and the lender re-amortizes the reduced balance over the remaining loan term to lower the monthly payment while keeping the existing interest rate.

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