10 biggest myths about bridge loans (and what the market misunderstands)

Bridge loan expert Sofia Nadjibi looks at consumers’ biggest objections and misconceptions about bridge loans, so you can help steer them in the right direction

Loans for short-term residential financing, now known as bridge loans, have existed since the mid-20th century, yet many real estate agents and loan officers still treat them as an edgy, last-resort strategy. 

In reality, however, bridge loans are powerful tools for a variety of situations, and understanding how they work can help agents serve clients more efficiently – and win more business. 

Whether you’re looking for a differentiator to win more listings or need a creative financing solution that works for seller-buyers on a short timeline, it’s worth unpacking the myths and misconceptions that may have kept you from recommending bridge loans as an option. Otherwise, you, and your clients, may both be leaving money on the table.

Myth 1: Bridge loans are too risky

Because it carries a higher interest rate and a shorter term than most residential mortgages, you may be worried that bridge loans present an outsized risk for your clients. In reality, greater risk lies in trying to time two transactions perfectly in a market environment where delays can derail both deals. 

In many states, like California, bridge loans are cross-collateralized, short-term and fully backed by home equity, actually reducing risk. There is no prepayment penalty for these loans, either, meaning you only pay interest on the days you keep the loan.

Myth 2: Clients need income documentation to qualify

For clients exhausted by paperwork from their traditional mortgage, the idea of more documentation can be daunting. Fortunately, qualifying for a bridge loan is straightforward– all you’ll need is sufficient home equity and a credit check. No pay stubs, tax returns or W2s are required. 

Myth 3: It’s more expensive than a traditional mortgage 

While the interest on a bridge loan is higher than that on a traditional mortgage, their short duration often makes them cost-effective. Many consumers actually save money when they use a bridge loan–even finding it pays for itself when all is said and done. 

The cost of a bridge loan can be offset by the financial gain of buying before closing on the sale of a property since:

• Buyers avoid double moves (no rentals, storage unit or paying the movers twice).
• Buyers enjoy stronger leverage when negotiating, since their offer is equivalent to a cash-like, non-contingent buyer.
• Sellers may sell for more since the real estate agent can prep, stage and show a vacant home, further offsetting the cost of the bridge loan.

Myth 4: Bridge loans take too long to underwrite and close 

The streamlined processing of a bridge loan allows them to be approved in less than 24 hours in many cases, closing in as little as 14 days — or less, in certain circumstances. 

Myth 5: There is added cost and commitment involved with getting approved for a bridge loan

Applying for a bridge loan comes at no added cost and no obligation. In fact, we encourage clients to get pre-approved for a bridge loan while they’re shopping around, just in case. 

If they don’t use the bridge loan, there’s no harm done. But if the perfect home appears unexpectedly, they’ll be ready to make a “cash-like” offer immediately. Should they proceed with the bridge loan, interest and closing costs are simply due before funding.

Myth 6: Buyers can’t compete with cash buyers unless they actually have cash

With a bridge loan, homeowners can leverage the equity from their current property to present a cash-like offer– without liquidating assets. Thus, the real estate agent can write a competitive, non-contingent offer that behaves like cash even before the sale of the current home.

Myth 7: The process is complicated and requires multiple loans 

A bridge loan is a single, cross-collateralized loan secured by both the property for sale and the property being purchased. Due to its minimal documentation requirements and a streamlined structure, it’s often described by clients and agents as the easiest transaction they’ve ever done.

Myth 8: Clients are stuck if the market slows down

Bridge loans work well in all market conditions, including slower ones, because homeowners:

• Find better deals on the buy side where homes sit longer
• Maximize sale price by staging and listing at the right time.
• Have breathing room to wait for the right buyer and price
• Can make needed repairs without pressure
• Avoid rushed sales and underpriced sales.

In any market, more options mean better outcomes for clients.

Myth 9: Bridge loans are only for ‘upsizing’ 

Bridge loans are invaluable for seniors and clients who are downsizing, relocating, or managing life transitions.  Here’s why:

• Bridge loans simplify the transition for downsizing senior clients, allowing them to move first and sell once they’re settled, thus avoiding double moves. In addition, Bridge funds can also cover repair costs and staging needed to offset deferred maintenance and out-of-date design.
• For retired clients who have all of their money tied up in home equity but are on a fixed retirement income, bridge loans offer the financial flexibility needed to buy then sell.
• For clients who are relocating,bridge loans remove the burden of juggling two mortgages or accepting a quick, discounted sale. This flexibility restores control and reduces stress- a critical advantage during major moves or life changes. 

Myth 10: Clients are stuck with a high interest loan for a fixed amount of time 

There is zero prepayment penalty on a bridge loan, so the client controls the timing. That means they can pay off the loan as soon as their current residence sells. Many  homeowners do so in fewer than two months. In any case, they only pay interest on the number of days they have the loan.

A bridge loan is a valuable tool to keep in your toolbox, allowing you to offer clients more options during an otherwise uncertain and stressful time. Knowing how to talk about it to your clients makes you more than an agent — it makes you a resource.

Sofia Nadjibi is the founder of Golden Gate Lending Group.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].

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