Bridge financing is a short-term solution that can help you access equity from your existing property to put towards the down payment of your new home. This type of financing is especially useful when you need to bridge the financial gap between the firm sale of your current home and the firm commitment to purchasing your new home.
Bridge loans typically range from 30 days to 1 year, with an average of six months in length. To be eligible for a bridge loan, you must have a firm sale agreement in place on your existing home, meaning all subjects have been removed. You will also require a purchase agreement for the new home to verify the amount required.
It is important to note that if you have not yet sold your home, you will not be eligible for bridge financing, as the lender needs that to accurately calculate how much equity you have available and if you can afford your new home. If you are currently looking to sell, or are in the midst of selling your home and considering bridge financing, it is important to understand that unless you can qualify and pay for two mortgages, you should always sell your existing home before purchasing a new one.
If you have sold your existing home but the closing date comes after the closing date of the new property you just purchased, then bridge financing will likely be your best option. However, it is important to consider whether or not you think you need bridge financing, as not all lenders provide this option. I can help you find a lender that provides the options you need.
It is also important to mention that bridge financing typically costs more than your traditional mortgage. Expect the Prime Rate plus 2, 3, or 4 percent, as well as an administration fee. In some cases, if you require a loan over $200,000 or a loan for more than 120 days, your lender may register a lien on the property until the loan is repaid. To remove this lien, you will need to consider the added costs of paying for a real estate lawyer.
If you have purchased your new home and are closing the deal, but your existing home has not yet sold, you would not qualify for bridge financing and would therefore need to consider a private loan. Private financing is expensive, but it is generally a more affordable option versus lowering the asking price of your existing home and losing out on tens of thousands just to sell quickly.
Private loans are dependent on having enough equity in your current property to qualify and are more expensive than traditional mortgages, with interest rates averaging anywhere from 7-15 percent. The costs associated with a higher interest rate are in addition to an up-front lender fee and potential broker fee. These amounts will vary based on your specific situation with consideration to: time required for the loan, the loan amount, loan-to-value ratio, credit bureau, property location, etc.
In conclusion, when it comes to bridge financing and selling and buying your home, seeking out a specialized mortgage broker (ahem me!) who can help you navigate the process and find the best options available to you can save you time and money. Remember, bridge financing is a short-term solution, so it is important to have a clear understanding of the costs and requirements associated with this type of financing before making any decisions.