Even though this might have been your intention, It is unlikely that the first home you buy will be the home you stay in forever. At some point, you’ll want to sell and buy a new home – either to upgrade or downsize or move locations. And most homeowners will want to take equity from their existing home and use it towards the purchase of their new home.
Unfortunately, sometimes you get stuck in a situation where the closing date for the home you’re purchasing is before the closing date of the home you’re selling, leaving you without a down payment for the new home because it’s tied up in equity. Bridge financing is the tool used to help borrowers who find themselves in this situation.
It is estimated that 20-30% of homeowners use bridge financing when purchasing a new home.
Which Lender’s offer Bridge Loans?
Because Bridge Loans are quite common, they used to be offered by virtually every lender. Of late though, we have been finding that lenders have become more stringent on their policies, and therefore it is always best to check with your mortgage broker. There are some options available in the market, lenders who solely focus on Bridge Financing.
How Much Can I Access and for How Long?
Most lenders are comfortable with lending up to $200,000 for as many as 120 days. If you require a larger loan or a longer amount of time, your lender will evaluate your situation on a case-by-case basis and more work may be required. For example, on most bridge loans, the lender will not register a lien on your property. For larger, longer loans, however, they may need to consider doing so; this will be more expensive, as legal fees will be involved.
How Bridge Financing is Calculated
The Bridge Loan will be for the amount of days that you need the money for.
We have to provide an illustration to explain the calculation process:
Let’s say the closing date for your current home is 90 days away, while the closing date for your new home is in just 35 days. A bridge loan will cover your equity over the 55-day period (90 days – 35 days).
For example, let’s say you are purchasing a $500,000 home and you made a 5% deposit ($500,000 x 0.05 = $25,000), but you want to put down the $165,000 of equity you have in your existing home. The trouble is your purchase close date is February 15th and the sale of your existing home doesn’t close until April 10th. In this situation, you will need a bridge loan for the difference between your deposit and your total down payment. Your calculation would look like this:
You will need to bridge a total amount of $140,000
—-> Bridge Loan Amount = (Total Equity from the sale of your home – the deposit that you have already put down)
—-> ($165,000-25,000) = $140,000
Like with any loan, you will have to pay interest on a bridge loan – often at a rate similar to an open mortgage or an unsecured personal line of credit. While the interest rate on your bridge loan is higher than your mortgage rate – usually Prime + 2.00% or Prime + 3.00% – it will only be charged for a short period of time, as when the sale of your property completes, the equity from your previous home will be available to repay the loan.
So the number might seem high, but over a short period of time, the amount of interest you’ll be charged will be small. On top of this interest, your lender will likely also charge a flat administration fee – typically between $200-$500.
Finally, as mentioned above, if you require a larger loan (over $200,000) or a loan for more than 120 days, your lender may register a lien on your property. In order to remove the lien, you will need to hire and pay for the services of a real estate lawyer.
How to Qualify for Bridge Financing
All you need to qualify for a bridge loan is a copy of the Firm Sale Agreement from your current home, and a copy of the most recent mortgage statement to show the current balance owing if you have a mortgage, and the Purchase Agreement for your new home.
*Note the key for obtaining a bridge loan with most lenders is that you must have a binding sale agreement on the sale of your existing home. This means that there is a buyer in place that is going to be closing on the property and you are going to be paid when they close.
In the event that you don’t have a firm sale agreement or a selling date, you may need to consider a private lender for the bridge loan, as most banks will not lend to you.
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