”Rarely in-life do things go as planned, especially in real estate. In a perfect world, when buying a new home, most people want to take possession of their new residence before having to move out of the old one. This makes moving a lot easier and allows you time for painting or renovations prior to moving into your new digs.
This is where it gets complicated: most people need the money from the sale of their existing home to come up with the down payment for their new house. This is where Bridge Financing comes in. Bridge financing allows you to Bridge the financial gap between the firm sale of your current home and the firm commitment to purchase your new home.
Bridge Financing allows you to access some of the equity in your existing property, which you can put towards the down payment on the new property you are buying.
Where many people get confused is that in order to secure bridge financing, you must have a firm sale on your existing house. That means all subjects (conditions) have been removed.
if you haven’t sold your home, you won’t get the bridge financing because there is no concrete way for a lender to calculate how much equity you have available and if you can afford your new home.
EXHAUST THE OTHER OPTIONS FIRST
For most people, unless you can qualify and pay for two mortgages, you should always sell your existing home before purchasing a new one. Why?
- With today’s property values constantly changing, you won’t know how much money you have until you sell your home. Your home is only worth what someone is willing to pay for it now. Past sales and future guesses don’t count!
- You need the proceeds from your existing home to help pay for your new home’s down payment, renovations, moving costs and (if required) the size of mortgage you qualify for.
BRIDGE OVER TROUBLED WATER
If you have sold your existing home but your closing date is after the closing date of the new property you just purchased, then bridge financing is your best option. Things to consider:
- Your new lender must allow for bridge financing, which not all do. Your mortgage broker can work with you to find a lender that offers bridge financing.
- Bridge financing costs more than your traditional mortgage. Expect the Prime rate plus two to four per cent, plus an administrative fee.
- Typically, bridge loans are restricted to 90 days.
What happens if you don’t sell your home? Banks will not approve you with a bridge loan if you don’t have a firm sale agreement for your home, since the loan can’t be open-ended. If you don’t have a firm selling date you may need to consider a private lender for the bridge loan.
If you have purchased your home, the deal is closing and your existing home has not sold, you may have to take out a private loan. Some things to consider:
- This option is expensive and is based on your having enough equity in your current property to qualify.
- Private financing comes with a high interest rate – typically seven to 15 per cent plus an up-front lender fee plus broker fee. These amounts will vary based on your specific situation., such as the time required for the loan, the loan amount, loan-to-value ratio, credit bureau, property location, etc.
- Private financing is expensive but it could be cheaper than lowering the purchase price of your existing home by tens of thousands of dollars to sell your existing home quickly.
In case your bank doesn’t do this type of financing, you must use a specialized mortgage broker who has access to individuals that lend money out privately. Bridge financing and private financing are solutions when your buy and sell dates don’t work.”