Bridge Financing – Helping You Buy a New Home Before Your Existing Home Completes
If you are looking to sell your current home and use your equity as a down payment on a new home, what do you do if you have to pay for your new home before you complete on the old one? You need a short-term loan to bridge the gap between the two transaction dates and the solution, appropriately enough, is called bridge financing.
Let’s start by addressing a common concern: If you need a bridge loan, it does not alter or limit your ability to qualify for a mortgage in any way. You don’t actually need to qualify for bridge financing itself – the only requirement is that you have an unconditional offer to purchase for the property you are selling. Using this contract in combination with your traditional mortgage loan - your lender simply bridges the financing gap to help facilitate the overall transaction.
Here is an example of how a bridge loan would work:
Assume you have just accepted an unconditional offer to purchase your current property for $1,000,000 on September 30. Your calculations show that after paying off your existing mortgage of $400,000 and covering your disposition costs, you will be left with net proceeds of $560,000
You then buy a new property for $1,250,000, but the sellers want you to purchase on September 21, which is 9 days before you will complete the sale of your existing home.
Your new long term mortgage amount will be $690,000 so in addition to this you will need your equity of $560,000 in order to complete the purchase on September 21 but you won’t receive it from your buyer until October 30. As such, your mortgage broker helps you secure a 9-day bridge loan at Prime +2% (5% in today’s terms) at a cost of $691. Problem solved.
Because bridge loans are usually unsecured and short term, lenders charge higher rates; as in the example above, you should expect to pay somewhere in the range of Prime + 2% to Prime + 5%, which works out to 5% to 8% in today’s terms, depending on the amount and length of loan. Most lenders will also charge an application fee of anywhere between $125 up to 0.25% of the bridge loan amount which in the above example would be $1,400. Keep in mind that, on balance, bridge loan rates will have far less impact on your overall financing costs than mortgage rates because they only apply on the shortfall, and they are only in place for a brief period of time.
While not all lenders offer bridge financing, an experienced, independent mortgage broker will have access to several who do. In an ideal situation your dates will all coincide but in the event they don’t you can use bridge financing as a tool to allow you to make the dream of owing that new home come true.