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The main difference between a soft vs. hard credit check is that each hard check can knock a few points off your credit score, whereas soft checks don’t affect your score. Both hard and soft checks pull the same financial data but for different purposes. Hard checks are typically done when you apply for a loan or credit card; soft checks are conducted for most other purposes, such as pre-screening for credit card offers.

It’s important for consumers to understand this difference because too many hard checks — also known as hard pulls and hard inquiries — can significantly lower your credit score. This in turn can hurt your chances of getting the best offers on credit cards and loans. Keep reading to learn more about credit checks and how to prevent unnecessary hard checks of your credit file.

What Is a Soft Credit Inquiry?

A soft inquiry is when a person or company accesses your credit as part of a background check. They will be able to look at:

•   The number and type of all your credit accounts

•   Credit card balances

•   Loan balances

•   Payment history for revolving credit (credit cards and home equity lines of credit)

•   Payment history for installment loans (auto loans, mortgages, student loans, and personal loans)

•   Accounts gone to collections

•   Tax liens and other public records

Soft inquiries are not used during loan or credit card applications, and do not require the consumer’s permission or involvement. Reasons for a soft check can include:

•   Employment pre-screening

•   Rental applications

•   Insurance evaluations

•   Pre-screening for financial offers by mail

•   Loan prequalification

•   Checking your own credit file

•   When you’re shopping personal loan interest rates or credit cards

Soft credit checks do not affect your credit score, no matter how often they take place. Some soft checks appear on your credit report, but not all — you may never find out they took place.

When they are listed, you might see language like “inquiries that do not affect your credit rating,” along with the name of the requester and the date of the inquiry. Only the consumer can see soft inquiries on their report; creditors cannot.

Recommended: Does Applying for Credit Cards Hurt Your Credit Score?

What Is a Hard Credit Inquiry?

A hard credit inquiry typically takes place when you apply for credit, such as loans or credit cards, and give permission for the lender or creditor to pull your credit file. As with a soft credit pull, the lender will look at the financial information listed above.

Each hard pull may lower your credit score — but typically by less than five points, according to FICO® Score. All hard inquiries appear on your credit report. While they stay there for about two years, they stop affecting your credit score after 12 months.

Not all loans require a hard credit inquiry — but consider that a red flag. Some small local lenders may offer short-term, high-interest, unsecured personal loans. Borrowers must show proof of income via a recent paycheck, but no credit check is required. The risks of these “payday loans” are so great that many states have outlawed them.

Avoiding Hard Credit Inquiries

Consumers should carefully consider if they really need new credit before applying for an account that requires a hard credit check.

For example, department stores and some chains like to entice you to apply for their store credit card by offering a generous discount on your purchase as you’re checking out. In that situation, ask yourself if it’s worth a credit score hit (albeit a small one).

Another way to minimize hard inquiries is to ask which type of credit check a company intends to run. If, for example, a cable company usually requires a hard credit inquiry to open an account, you might ask if a hard pull can be avoided. Other situations where there may be some flexibility include:

•   Rental applications

•   Leasing a car

•   New utility accounts

•   Requesting a higher credit limit on an existing account

Disputing Inaccurate Hard Inquiries

A good financial rule of thumb is to review your credit reports every year to check for common credit report errors and signs of identity theft. You can access your credit reports from the three consumer credit bureaus (Equifax, Experian, and TransUnion) for free at AnnualCreditReport.com.

To check for inaccurate hard inquiries, look for a section on your credit report with any of these labels:

•   Credit inquiries

•   Hard inquiries

•   Regular inquiries

•   Requests viewed by others

You can dispute hard inquiries and remove them from your credit reports under certain circumstances: if you didn’t apply for a new credit account, you didn’t give permission for the inquiry, or the inquiry was added by mistake.

That said, under federal law, certain organizations with a “specific, legitimate purpose” can access your credit file without written permission. They include:

•   Government agencies, usually in the context of licensing or benefits applications

•   Collection agencies

•   Insurance companies, when certain restrictions are met

•   Entities that have a court order, as in child support hearings

Even so, if you didn’t give permission for a hard credit pull, it’s worth filing a dispute to request that the credit check be removed from your report.

Consumers may dispute hard inquiries online through AnnualCreditReport.com, or by writing to the individual credit reporting agencies.

Hard Credit Checks and Your Credit Scores

As mentioned, hard inquiries appear on your credit report, and each hard pull may lower your credit score by five points or less. Here we’ll go into a bit more detail.

Why Hard Inquiries Matter

Multiple hard inquiries within a short time frame can do significant damage to your credit score. It could potentially be enough to move you from the Good credit range down to the merely Fair. Someone in a Fair credit range can pay substantially more over a lifetime in interest and fees than someone with a Good score or higher.

How Many Points Will a Hard Inquiry Cost You?

As noted above, each hard pull can lower your credit score by less than five points. One or two hard inquiries per year may not matter, especially if you’re not planning on applying for a loan.

If you’re rate shopping for a particular type of loan, such as a mortgage or auto loan, keep in mind that multiple hard credit checks within a specific period (often several weeks) for the same purpose are usually counted as one inquiry by credit scoring companies. However, this is not the case with hard pulls for credit card applications.

How Long Do Inquiries Stay On Your Credit?

Hard inquiries stay on your credit report for two years. While they’re on your credit report, they are visible to anyone who checks your credit. But their impact on your credit score typically lasts less than 12 months.

Soft inquiries may remain on your credit report for one or two years, but only you can see them.

The Takeaway

Soft credit inquiries do not affect a credit score, while hard credit inquiries may cost you a few points. In both cases, individuals or businesses pull information from your credit reports. Checking your own credit report counts as a soft pull, as do most other situations where the consumer hasn’t given written permission. Hard pulls are typically done only when you’re applying for a loan or new credit account.

Many lenders allow you to “prequalify” for a loan without running a hard credit check. This allows you to shop rates without risking any impact to your credit.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q324-025

If you’re one of the more than 20 million Americans working remotely, you might be tempted to buy a house out of state. Or maybe you just need a change of scenery.

Buying a house long distance can be a challenge, but it’s doable with a plan in place.

Why Buy a House in Another State?

There are multiple reasons to consider a house in a different state. Here are some.

Affordability

People may be lured by the cost of living of a state and its quality of life, or trying to escape high costs in the state they are leaving.

More than 350,000 people left California (the country’s third-highest state in cost-of-living rankings) from April 2020 to January 2022 for Arizona, Texas, Florida, Washington, and other states. This trend slowed in 2023, but the state still lost more than 250,000 people.

Job Relocation

Some companies move personnel out of state, and some employees are good with that. A Graebel report exploring the Great Resignation found that 70% of knowledge workers who resigned in the past two years may have stayed if they’d been offered the same role in a different region of the country.

Family Reasons

Some folks choose to buy a house out of state to be closer to parents, children, or grandchildren. And people in their 40s,especially, may have aging parents and financial concerns on their minds.

Retirement

Americans entering retirement may want to buy a home in a state where the weather and lifestyle are more appealing. When it comes to a home, some may want to downsize.

How to Purchase a Home in Another State

Buying a house from out of state may be a challenge, but people do do it.

It can be tough to buy a house if you already have a house and a home mortgage loan. Homeowners have been known to use a home equity loan or bridge loan to fund the down payment on another house.

A personal loan can fund travel and moving costs.

If you’re ready to move on, it might be a good idea to sell and maybe ask for a leaseback. If you’re in a hurry, learn how to sell a house fast.

1. Virtually Explore

It’s easy to research cities, states, and communities online. There’s a listicle for almost everything.

For example, maybe you’re interested in the safest cities in the U.S.

Or the 50 most popular suburbs.

It can also be helpful to explore housing market trends by city.

Areavibes, BestPlaces, and HomeSnacks provide rankings or information. Coldwell Banker introduced Move Meter, to compare locations across the country. Or you could use Google Maps or Google Earth to study an out-of-state home’s proximity to schools, medical centers, law enforcement agencies, parks, and restaurants.

2. Link Up to Social Media

Social media platforms like Facebook Groups and Nextdoor can provide a personal sense of home buying and community. These groups are user-friendly to newcomers, and many group members are happy to answer questions about life in their city or town.

3. Ask Co-Workers, Friends, or Family

If you’re moving out of state for a job, check in with future co-workers for advice about the homes and neighborhoods. If you’re moving near friends or family members, pick their brains. Is this going to be a good spot for you?

Moving is stressful enough. If you’re one of the growing number of people interested in financially downsizing, you may want to just exhale and enjoy when you land.

4. Consider Talking to a Relocation Specialist

Yes, home relocation professionals exist. And they do everything from connecting clients with a real estate agent to finding a long-distance moving company, scouring school districts, securing a storage space, and supervising a contractor’s work if the client is buying or building a house.

Relocation companies can also suggest local service providers and transport pets and vehicles across state lines.
Relocation services are often free of charge because the specialists earn their money from third-party vendors like real estate firms and employers transferring employees.

If you’re not inclined to hire a relocation specialist, here’s some helpful reading before making a big move:

•   How to move across the country

•   How to move to another state

•   The ultimate moving checklist

You can look into the safety record of carriers on the U.S. Department of Transportation website.

5. Find a Reliable Real Estate Agent

A brave few who are interested in buying a house out of state opt to go without an agent.

It’s true that you can buy a house without a Realtor® — but even a local home sale may be challenging without a buyer’s agent in your corner.

Partnering with an experienced real estate agent who is based in the area where you hope to move could be highly beneficial.

Besides familiarity with neighborhoods, schools, and vibe, a buyer’s agent can walk a future homebuyer through local zoning regulations and the permit process.

6. Consider Visiting IRL

It’s not that rare to buy a house sight unseen. That can work out.

But someone looking to buy a house in a new state may want a real visit. You may receive short notice on a viewing date, so it could be helpful to budget for out-of-state travel as part of the buildup to buying a home in another state.

While a real estate agent can act as a proxy for homebuyers, there may be nothing like being onsite during the home inspection of a property you’ve made an offer on.

Then again, if you adore a property and must have it, you might waive some contingencies in the case of multiple offers.

7. Get Preapproved for a Mortgage

It can be easier to find a real estate agent or relocation specialist with a mortgage preapproval letter in hand.

When a lender preapproves a mortgage (a credit check and a review of financial assets is typical), it is tentatively greenlighting a specific home loan amount at a particular interest rate, which is not locked unless the lender offers a lock.

Obtaining preapproval tells home sellers that you’re qualified for a home loan up to a certain amount.

8. Handle the Closing Online

Get ready, because closing on a house may take only 20 or 30 days.

In some cases, everyone huddles to sign closing paperwork. Other times, buyers and sellers sign separately.

But most states have approved remote online notarization, when buyers join a video call, present their government-issued IDs to a title company rep and a notary, and sign all paperwork electronically.

The Takeaway

Buying a house out of state requires investigation and probably a good real estate agent. Getting preapproved for a mortgage can ease the path to a new address.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q424-111

Has this happened to you? You’re thinking about getting a personal loan but haven’t yet applied. Then you get a letter in the mail: “You’re preapproved or prequalified for a personal loan!” What does that mean?

Some lenders use “prequalified” interchangeably with “preapproved,” but they are different. Here, we’ll discuss preapproval vs. prequalification and how to know if you’re a good candidate for a personal loan.

What Does Being Prequalified for a Loan Mean?

Prequalification is sometimes considered the first step in the loan approval process. You can think of it as a less comprehensive version of a preapproval. Prequalification simply means that you fit the general description of a customer typically qualified for a loan.

Based on your general profile, the lender can give you an idea of the size of loan you can qualify for. While prequalification can be done fairly quickly, it does not involve a full analysis of your credit report or verification of the financial information you provide. Because of that, there’s no guarantee that your loan will be approved.

Recommended: What Is a Personal Loan?

What Does Loan Preapproval Mean?

Preapproval is a more in-depth stage of the personal loan approval process. A lender will have accessed your financial history to assess you as a potential customer. Being preapproved means that, based on the information accessed, you most likely will be approved for a loan.

Preapproval allows the lender to show you the size of the loan you might qualify for, and the interest rate and loan terms they’re willing to offer. It’s a step closer to final approval of your loan application. However, this doesn’t automatically translate to being fully approved. For example, a hard credit inquiry can pull in information previously unseen by the lender that was not considered at the preapproval stage.

Does Prequalification or Preapproval Affect Your Credit Score?

Lenders typically prequalify you on the basis of financial information that you provide and perhaps a soft inquiry into your credit history. Soft inquiries don’t affect your credit score, so it’s unlikely that prequalification will either.

Because the prequalification process varies by lender, however, it’s impossible to say for sure that prequalification won’t impact your credit. If it does, the impact will be small and temporary.

Preapprovals are more rigorous than prequalifications and closer to what you’ll experience when you actually apply for a loan. Preapprovals often involve a hard credit inquiry, which does impact your credit. But again, any effect will be minor.

Recommended: Should You Borrow Money During a Recession?

How Do I Know If I’m a Good Candidate for a Personal Loan?

A personal loan application considers your existing debt and your ability to repay the loan. Your current employment will factor into how well-suited you are to repay the loan, as will your credit score. In most cases, this means you need a good credit score to qualify for an unsecured personal loan at a low interest rate.

Lenders will also consider your “DTI” — the ratio of your income to existing debt — and what kind of monthly payments you can afford.

If you can’t otherwise qualify because of a poor credit score, consider asking a close friend or family member to cosign your personal loan. Adding a cosigner with a good credit score to your application can help you get a lower interest rate on your loan.

Will You Prequalify for a SoFi Personal Loan?

Some nontraditional lenders, like SoFi, look at other parts of a financial package when evaluating a candidate’s personal loan application.

SoFi considers additional factors such as your earning potential and cash flow after expenses. This means that even if you have a shorter credit history (because you just graduated college, for example) you may still qualify for a personal loan based on your education and career.

To find out if you qualify for a SoFi personal loan, first go through the online prequalification process. This requires you to create an account, and input your basic personal information, education, and employment history. It takes only a few minutes, after which SoFi will immediately show you which loan options you prequalify for.

After selecting a preliminary personal loan option, you’ll have to finalize your application by uploading documentation to verify your personal information. This may include pay stubs and bank statements. Once you’re approved, the loan is typically disbursed within a week.

The Takeaway

Wondering what it means to be prequalified vs. preapproved? You’re not alone. The terms may sound similar, but there are differences to be aware of.

Prequalification is often the first step of the loan application process, and it typically takes less time and requires fewer details from the borrower. Preapproval is the second step of the process. Here, you can see the size of the loan you could qualify for and the potential terms and interest rate. However, neither step is a guarantee that you’ll be approved for the loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-048

Many of us would love to own a vacation home, but the added expense is not always doable. Because we can’t all own multiple properties, vacation timeshares continue to be a popular choice for solo travelers, couples, and families who want more space, amenities, and “a place to call home” at their locale of choice.

We’ll give you an honest rundown of how timeshares work, their pros and cons, and a few financing options.

What Is a Timeshare?

A timeshare is a way for multiple unrelated purchasers to acquire a fractional share of a vacation property, which they take turns using. They share costs, which can make timeshares far cheaper than buying a vacation home of one’s own.

Timeshares are a popular way to vacation. In fact, nearly 10 million U.S. households own at least one timeshare, according to the American Resort Development Association (ARDA). The average price of a timeshare transaction is $23,940. This figure can vary widely depending on the location, size, and quality of the property, the length of stay,

How Do Timeshares Work?

If you’ve ever been lured to a sales presentation by the promise of a free hotel stay, spa treatment, or gift card, it was probably for a vacation timeshare. As long as you sit through the sales pitch, you get your freebie. Some invitees go on to make a purchase. You can also buy a timeshare on the secondary market, taking over from a previous owner.

What you’re getting is access to a property for a set amount of time per year (usually one to two weeks) in a desirable resort location. Timeshares may be located near the beach, ski resorts, or amusement parks. You can trade weeks with other owners and sometimes even try out other properties around the country — or around the world — in a trade.

In addition to the upfront cost of the timeshare, owners pay annual maintenance fees based on the size of the property — about $1,120 on average — whether or not you use your timeshare that year. These fees, which cover the cost of upkeep and cleaning, often increase over time with the cost of living. Timeshare owners may also have to pay service charges, such as fees due at booking.

Recommended: Loans With No Credit Check

Types of Timeshares

There are two broad categories of timeshare ownership: deeded and non-deeded. In addition, you’ll find four types of timeshare use periods: fixed week, floating week, fractional ownership, and points system.

It’s important to understand all of these terms before you commit.

Deeded Timeshare

With a deeded structure, each party owns a piece of the property, which is tied to the amount of time they can spend there. The partial owner receives a deed for the property that tells them when they are allowed to use it. For example, a property that sells timeshares in one-week increments will have 52 deeds, one for each week of the year.

Non-deeded Timeshare

Non-deeded timeshares work on a leasing system, where the developer remains the owner of the property. You can lease a property for a set period during the year, or a floating period that allows you greater flexibility. Your lease expires after a predetermined period.

Fixed-Week

Timeshares offer one of a handful of options for use periods. Fixed-week means you can use the property during the same set week each year.

Floating-Week

Floating-week agreements allow you to choose when you use the property depending on availability.

Fractional Ownership

Most timeshare owners have access to the property for one or two weeks a year. Fractional timeshares are available for five weeks per year or more. In this ownership structure, there are fewer buyers involved, usually six to 12. Each party holds an equal share of the title, and the cost of maintenance and taxes are split.
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Points System

Finally, you may be able to purchase “points” that you can use in different timeshare locations at various times of the year.

Is a Timeshare a Good Investment?

Getting out of a timeshare can be difficult. Selling sometimes involves a financial loss, which means they are not necessarily a good investment. However, if you purchase a timeshare in a place that your family will want to return to for a long time — and can easily get to — you may end up spending less than you would if you were to purchase a vacation home.

Benefits of Timeshare Loans

The timeshare developer will likely offer you financing as part of their sales pitch. The main benefit of a timeshare loan is convenience. And if you’re happy to return to the same vacation spot year after year, you may save money compared to staying in hotels. Plus, for many people, it may be the only way they can afford getting a vacation home.

Drawbacks of Timeshare Loans

Developer financing offers often come with very high interest rates, especially for buyers with lower credit scores: up to 20%. And if you eventually decide to sell, you will probably lose money. That’s because timeshares tend not to gain value over time. Finally, if you’re not careful about running the numbers before you commit, you can end up paying more in annual fees than you expect.

Recommended: What Is Revolving Credit?

Financing a Timeshare

Developer financing is often proposed as the only timeshare financing option, especially if you buy while you’re on vacation. However, with a little advance planning, there are alternative options for financing timeshares. If developer financing is taken as an initial timeshare financing option, some timeshare owners may want to consider timeshare refinance in the future.

Home Equity Loan

If you have equity built up in your primary home, it may be possible for you to obtain a home equity loan from a private lender to purchase a timeshare. Home equity loans are typically used for expenses or investments that will improve the resale value of your primary residence, but they can be used for timeshare financing as well.

Home equity loans are “secured” loans, meaning they use your house as collateral. As a result, lenders will give you a lower interest rate compared to the rate on an unsecured timeshare loan offered at a developer pitch. You can learn more about the differences in our guide to secured vs. unsecured loans.

Additionally, the interest you pay on a home equity loan for a timeshare purchase may be tax-deductible as long as the timeshare meets IRS requirements, in addition to other factors. Before using a home equity loan as timeshare financing, or even to refinance timeshares, be aware of the risk you are taking on. If you fail to pay back your loan, your lender may seize your house to recoup their losses.

Personal Loan

Another option to consider for timeshare financing is obtaining a personal loan from a bank or an online lender. While interest rates for personal loans can be higher than rates for home equity loans, you’ll likely find a loan with a lower rate than those offered by the timeshare sales agent.

Additionally, with an unsecured personal loan as an option for timeshare financing, your primary residence is not at risk in the event of default.

Getting approved for a personal loan is generally a simpler process than qualifying for a home equity loan. Online lenders, in particular, offer competitive rates for personal loans and are streamlining the process as much as possible.

The Takeaway

Timeshares offer one way to secure a place to stay in your favorite vacation destination each year — without having to buy a second home. And timeshares may save you money over time compared to the cost of a high-end hotel. However, beware of timeshare financing offered by developers. Interest rates can be as high as 20%. There are other ways to finance a timeshare that can be more affordable, including home equity loans and personal loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can I rent my timeshare to someone else?

Whether or not you can rent your timeshare out to others will depend on your timeshare agreement. But in many cases, your timeshare resort will allow you to rent out your allotted time at the property.

Can I sell my timeshare?

Your timeshare agreement will give you details about when and how you can sell your timeshare. In most cases, you should be able to sell, but it may be hard to do so, and you may take a financial loss.

Can I transfer ownership of my timeshare or leave it to my heirs?

You can leave ownership of a timeshare to your heirs when you die and even transfer ownership as a gift while you’re living. Once again, refer to your timeshare agreement for rules about what is possible and how to carry out a transfer.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q424-047

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.

But there are pros and cons to using this type of financing. A bridge loan can prove expensive.

Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.

Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.

Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

Most bridge loans are set up to be repaid within a year.

Note: SoFi does not offer bridge loans at this time. However, SoFi does offer HELOC options.

How Does a Bridge Loan Work?

Typically lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.

Even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.

What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough home equity (usually 20%, but some lenders might require at least 50%) in your current home to qualify for this type of interim financing.
Lenders typically issue bridge loans in one of these two ways:

•   One large loan. Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.

•   Second mortgage. Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay:

•   1.5% to 3% of the loan amount in closing costs

•   An origination fee, which can be as much as 3% of the loan value

Interest rates for bridge loans are generally higher than conventional loan rates.

Repaying a Bridge Loan

Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due.

Others call for a lump-sum interest payment that is taken from the total loan amount at closing.

A fully amortized bridge loan requires monthly payments that include both principal and interest.

How Long Does It Take to Get Approved for a Bridge Loan?

Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.

A bridge loan for investment property from a hard money lender can be approved and funded within a few days.

Examples of When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date. They could then go about getting a mortgage on their new home using the down payment they have stashed away.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.

Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job, or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve accepted and offer on your current home, the new-home closing might be weeks or even months away. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.

Bridge Loan Benefits and Disadvantages

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Disadvantages

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees.

Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan.

Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Alternatives to Bridge Loans

If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.

Home Equity Line of Credit (HELOC)

Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow, as needed, up to an approved limit, from the equity you have in your house.

The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that is on the market, so it may require advance planning to use this strategy.

Home Equity Loan

A home equity loan is another way to tap your equity to cover the down payment on your future home.

Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.

You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty.

Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

401(k) Loan or Withdrawal

If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).

Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history and a solid income, typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers when they haven’t yet sold their current home and wish to purchase a new one. But a bridge loan can be expensive, and not all that easy to get. Only buyers with sufficient equity and strong financials are candidates.

If you find yourself looking to bridge the gap between homes, you might also consider a personal loan or a HELOC, a home equity loan, or a personal loan among other alternatives. With a little due diligence and some paperwork, you’ll soon be financially prepared to purchase your next home.

FAQ

What are the cons of a bridge loan?

It can be harder to qualify for a bridge loan than for a standard home loan, and both costs and interest rate may be higher as well. And taking out a bridge loan means you may have to make payments on two loans if your first property doesn’t sell.

Why would someone get a bridge loan?

A homebuyer who has found their perfect next property but who is in a short-term cash crunch might opt for a bridge loan if they feel very confident that they can sell their current home quickly. This might be especially true in a hot market, where there is lots of competition for homes and the buyer wants to move quickly.

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