It’s amazing when life seems perfectly aligned. You win a new car just as your old car breaks down, the love of your life shows up precisely when you’ve decided you’re ready to settle down, and you close on the sale of your home on the exact same day when your new home purchase closes. Right? More like ya right!
Sometimes, perfect alignment can be just as illusive in real estate as it is in the rest of your life. So, you need to have a financial bridge in place that keeps you afloat when you move from one home to another. That’s literally where bridge financing gets its name.
If you close on your new home a day, week, or a couple of months prior to closing on the sale of your existing home, you may find yourself without the down payment you need for your new home, because it’s tied up in equity. Bridge financing is the solution to this issue.
Why Some People Buy Before They Sell
In most cases a good realtor will tell you to sell first and buy second. That helps to remove the chance that you’ll be left with two mortgages and no down payment. However, in particularly hot real estate markets, this best-case scenario isn’t always possible. For example, in real estate markets in desirable cities like Toronto and Vancouver, when you find a house you love, you have to grab it. By the same token, in these markets, if a person sells first they might find themselves homeless for a while, as they battle through ferocious bidding wars, trying to find a new place to live.
Another reason may simply be to make moving out easier. If you move into your new house a week or two before closing on your old house, it can relieve some of the packing and cleaning stress.
How Bridge Loans Work
Bridge financing is a short-term loan typically in the amount of less than $200,000. This loan pulls from the equity in your existing home to use as a down payment on your new home. For example, if you have a 90 day closing on your new home, but a 120 day closing on your old home, your bridge loan will cover you for the 30 day discrepancy. This means that you get the money for your down payment (minus your initial deposit) in time to pay down on your house.
Of course, with any loan, there will be the addition of interest and an administration fee, on top of the loan.
How to Qualify
If you are borrowing from your current mortgage provider, qualifying for a bridge loan is usually a very simple process … assuming that your current mortgage is with one of the big banks. Second tier mortgage lenders may not have the ability to provide you with a bridge loan, so you need to check with them prior to assuming this type of loan will be available to you.
If bridge financing is available to you, you simply need to go to your lender with the sale agreement from your current home and the purchase agreement for your new home to see just how much you can borrow. If it is not something that your mortgage lender can provide, you may need to consider a private lender.