The gist:

A bridge loan is a short-term financing solution for homeowners. Its purpose is to provide financial support during the transition period between selling an existing home and buying a new one. The loan allows you to use the equity in your current property as a down payment for the next one while you are waiting for the sale of your existing home to be completed.

In life, things rarely go as planned.

When it comes to buying a new home, most of us would like to take possession of it before having to move out of the old one. This would make the moving process a lot easier and give us time for painting or renovations before moving in. Unfortunately, this ideal scenario is complicated by the fact that most people need the money from the sale of their old home to fund the down payment for the new one. This is where bridge financing comes in.

What are bridge loans?

Bridge loans are short-term financing solutions that typically last from a few weeks to a few months. The need for a Bridge loan arises when the closing date on the home you have sold is after the closing date of the new property you have purchased. This type of financing enables you to access some of the equity in your existing property to put towards the purchase of your new home. To be eligible for a bridge loan, you must have a firm sale agreement in place for your existing home and a firm purchase agreement for the new one. If you haven’t sold your existing home yet, you won’t be eligible for bridge financing as the lender needs to know that you will not have to carry the costs of your existing home indefinitely moving forward. This enables the lender to exclude the costs (mortgage payment, property taxes, heating, etc..) associated with your existing home from your mortgage application.

Reasons to consider selling your existing home …before purchasing a new home

Property values are constantly changing, if your down payment is tied-up in the equity of your existing home, you may not know exactly how much will be available until your home actually sells. You may also need the proceeds from the sale to contribute towards costs such as down payment, renovations, closing and moving expenses.

Costs of bridge financing

Bridge financing typically costs more than traditional mortgages, with an interest rate based on the lenders Prime rate plus an adjustment factor of up to 5 percent and may or may not include an administration fee. Depending on the size of your loan and how long the bridge financing is for, your lender may register a lien on the existing property until the loan is repaid, which will require additional costs for a real estate lawyer.

If bridge financing is not available

If you have purchased your new home and are closing the deal, but your existing home hasn’t sold yet, you may need to consider alternative sources for financing. Private loans are more expensive than traditional mortgages, with an average interest rate of 7-15 percent, and additional up-front lender and brokerage fees. The specific costs will vary based on factors such as the loan amount, loan-to-value ratio, credit bureau, property and property location.

When it comes to bridge financing and selling and buying property, don’t waste your time trying to figure it out on your own. Get in touch and I can help you determine your best option!

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