Maybe you’ve met your soulmate and it’s time to move out of your studio apartment. Perhaps baby #2 is on the way and your 2-bedroom starter home is starting to feel a bit cramped. Or maybe you’re retiring to a big sprawling acreage in the country. Whatever the reason, it’s time to purchase a new home. In a perfect world, most people would want to have possession of their new home before the current one sells. The overlap allows time for painting, touchups and other renovations. Life is not perfect though. Unless you can qualify and afford to pay two mortgages, typically, the down payment for the new purchase is coming from the sale of the current home. If the sale closes after the purchase and funds are needed in the interim, that’s 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. The key word here is FIRM. In order to secure bridge financing, all subjects must be removed from the sale. Without a firm sale, a lender can’t accurately determine how much equity you have available to go towards the new purchase.
You will want to make sure that your new lender is a lender that does in fact offer bridge financing. And that’s the benefit of working with a mortgage broker. I have access to a wide array of lenders, as well as first-hand knowledge of which lenders will offer bridge financing. The cost of bridge financing can vary between lenders, but has two components: an administrative fee plus interest charged on the loan. The interest rate will be higher than for a traditional mortgage, but you’re paying for the convenience, and ideally the bridge financing will only be in place for a short period of time. You can expect a rate somewhere around prime + 2 to 4% (prime = 3.2% at the time of this writing). The maximum term of the loan will also vary from lender to lender, but is typically between 30-90 days.
Upon approval, the bridge loan proceeds are advanced “in trust” to your solicitor, along with instructions from the lender to ensure that the required net proceeds of sale of the existing home are directed back to the lender to repay the bridge loan.
Now, what happens if your home doesn’t sell? That’s why the lender requires a firm sale agreement with subjects removed in order to qualify for a bridge loan. If you don’t have a firm selling date and can’t wait any longer to complete the purchase, you may need to explore private financing. This option can be more expensive as there are lender and broker fees charged and the interest rates are much higher. Though expensive, it could be cheaper than lowering the sale price of your existing home just to get the sale.
No two mortgages are created equal, and this is even more true for bridge loans & private financing. There are a lot of differences between lenders and it can take a lot of work sorting through everything. Save your time and get a mortgage broker like me working for you. If you have any questions about bridge financing, or any other mortgage-related questions, give me a call today.