How does a bridge loan work when you want to buy before you sell? Fannie Mae’s Selling Guide describes a loan whose funds “can be used for closing on a new principal residence before the current residence is sold.”
The guide also sets a documentation job for the lender. It has to document that the borrower can carry the payments for the new home, the current home, the bridge loan and other obligations.
So, under the guide, a bridge loan is one more loan the lender counts alongside both homes. The plan has to hold up on paper before an offer leans on it. The rules below come from the guide, with the questions worth taking to a loan officer.
What Is a Bridge Loan in a Home Purchase?
Fannie Mae’s Selling Guide topic on bridge and swing loans covers this kind of loan. The guide names it both ways, bridge or swing, and treats it as an acceptable source of funds for a buyer when the listed requirements are met. Those funds can help a buyer close on a new home before the current one sells.
Fannie Mae’s wording is that a bridge (or swing) loan is “an acceptable source of funds” provided the listed requirements are met. Two requirements follow.
The Selling Guide is the rulebook for lenders that sell loans to Fannie Mae, so it describes those loans. A different lender or a different loan program may handle a bridge loan another way. The guide gives no rate, no fee and no loan amount, so those come from the lender making the loan.
What Does a Lender Have to Check for a Bridge Loan?
Fannie Mae’s Selling Guide sets two requirements in that topic. The new home cannot be tied into securing the bridge loan. And the lender has to document that the borrower can carry every payment involved, not only the new mortgage. Neither requirement is about the rate or the amount.
Take the first one. Fannie Mae’s rule reads: “The bridge loan cannot be cross-collateralized against the new property.” In plain words, the new home cannot be what secures the bridge loan.
The second requirement is about payments. Under that rule the lender must “document the borrower’s ability to successfully carry the payments for the new home, the current home, the bridge loan, and other obligations.” That’s the new home, the current home, the bridge loan and everything else the borrower owes, on paper at once.
The topic adds one more line: “Fannie Mae does not have a specified limitation on the term of bridge loans.” The guide sets no limit there. How long a particular loan runs is a question for the lender making it.
How Does a Bridge Loan Count Toward Debt-to-Income?
Fannie Mae’s Selling Guide section on monthly debt obligations handles the debt side. The guide calls a bridge loan a contingent liability and counts it in the borrower’s recurring monthly debt, which puts it in the debt-to-income (DTI) ratio. That’s why the loan matters at underwriting.
The wording in that section is direct. A bridge loan “must be considered part of the borrower’s recurring monthly debt obligations and included in the DTI ratio calculation.”
The same paragraph opens with what the money is for: helping a borrower close on the next principal residence before the current one is sold. Purpose and debt treatment sit in the same place. A buyer who adds this loan to a plan should expect the lender to ask about it.
Does a Signed Contract on Your Current Home Change That?
Fannie Mae’s Selling Guide describes one way the bridge loan can stay out of the ratio. The lender needs two things on the current home: a signed sales contract, and confirmation that any financing conditions in it have been cleared. That’s a rule about the lender’s file. It isn’t a promise about any loan.
Fannie Mae says it will waive the requirement to count the debt when the documentation includes “a fully executed sales contract for the current residence, and confirmation that any financing contingencies have been cleared.”
Both items are on that list. A signed contract by itself isn’t the whole list, and the waiver depends on that documentation being in hand. Nothing in the guide makes it automatic.
If your offer on the next home depends on selling the current one first, how a home sale contingency affects your offer and your loan covers that separate clause.
What a Bridge Loan Plan Still Needs From Your Loan Officer
Those two Selling Guide topics explain what a lender has to check and how the loan counts as debt. Neither one gives a rate, a fee, a loan amount or a repayment plan. Those answers come from the lender making the loan and from your own file.
Fellowship’s mortgage process page describes what its team looks at: “We holistically assess income, debt-to-income ratio, credit score, employment trajectory, and property type to determine eligibility.” It adds: “Each loan program has different sets of eligibility guidelines.”
Fellowship’s home purchase page puts it this way: “Depending on your circumstances, one home loan may be better than another.” That’s why a plan to buy before you sell is worth talking through with a loan officer before you make an offer.
Borrowing against the equity in the home you’re leaving is a different route, and using home equity to buy another house walks through it.
Frequently Asked Questions About Bridge Loans
What is a bridge loan?
Fannie Mae’s Selling Guide names it a bridge (or swing) loan and calls it “an acceptable source of funds” when the listed requirements are met. In the guide’s description, the funds can go toward closing on the next principal residence before the current home is sold.
How does a bridge loan work for a home purchase?
Under the guide, the funds help close on the new home before the current one is sold. The lender must document that the borrower can carry the payments for the new home, the current home, the bridge loan and other obligations. The loan also counts in the DTI ratio.
Can the new home secure a bridge loan?
Not under the guide’s requirement. Its rule is that the bridge loan cannot be cross-collateralized against the new property, so the new home can’t be what secures it. How a particular loan would be secured is a question to put to the lender making it.
Does a bridge loan count as debt?
In the guide, yes. It treats the bridge loan as a contingent liability counted in the borrower’s recurring monthly debt and included in the DTI ratio. The guide also describes a documented exception: a signed sales contract for the current home, plus confirmation that financing contingencies have been cleared.
How long can a bridge loan last?
Fannie Mae’s Selling Guide sets no specified limitation on the term of bridge loans. So the length of any particular loan comes from its own terms, with the lender making it. That’s a question worth asking early, along with what happens if the current home hasn’t sold by the end of the term.
Who can tell me what my lender requires?
A loan officer reading your actual file. Fannie Mae’s Selling Guide is written for lenders that sell loans to Fannie Mae, so it describes those loans; another lender or loan program may handle a bridge loan differently. Bring the plan and ask what it would take in your case.
Questions to Bring to Your Loan Officer
A buy-before-sell plan is easiest to judge on paper. Under the guide, the payments counted are the ones on the new home, the current home, the bridge loan and other obligations. So bring questions instead of guesses, and keep the answers tied to your own file.
- How would the bridge loan be secured, given the guide’s rule that the new home can’t secure it?
- Which payments will you count: the new home, the current home, the bridge loan and my other obligations?
- Would a signed sales contract on my current home, with financing conditions cleared, change how the loan is counted?
- How long would the bridge loan run, and what’s the plan if the current home hasn’t sold by then?
When you’re ready, you can talk with a Fellowship loan officer about your purchase loan and your plan to buy before you sell.
This is general education about what Fannie Mae’s Selling Guide says, not legal, lending or financial advice, and not a commitment to lend.
