Have you ever heard the term “bridge financing”?
It may surprise you that it doesn’t have to do with purchasing a bridge and getting a loan to do it! But it is a situation that many home buyers encounter and it’s a solution you might be searching for.
When would I need bridge financing?
When you’re selling your home AND purchasing another home at the same time, the closing dates might not always match up. For example, you get possession of your new home on May 1st, and the home you’re selling closes on May 15th.
How do you pay for your new home if you don’t yet have the money from the sale of your current home?
Bridge financing.
If the home you are purchasing closes before the home you’re selling, this type of temporary loan will “bridge the gap” until you receive the proceeds from your sale.
So how does Bridge Financing work?
Most importantly, your home must be sold firm. That means there are no conditions outstanding on your sale: no home inspections, no financing conditions, no appraisals. The deal is totally done and just awaiting closing.
If your home sale is still in the conditional phase, a lender won’t be able to process bridge financing quite yet.
Typically, bridge loans are provided for a maximum of 60 days.
So when we say these are short-term, temporary loans, we mean it!
How much can I get for bridge financing?
It’s important to know how much you’re eligible to get before you apply for bridge financing. Typically we see higher closing costs for these sales (around 5-7% legal fees).
You’ll need to know how much you’ll be getting from your sale after all expenses.
Generally you should use this formula to calculate how much bridge financing you can expect:
Your down payment MINUS the deposit you submitted with your offer = Bridge Loan Amount
(Assuming you have at least this amount from your current home’s sale coming to you)
How much do bridge loans cost?
It varies from lender to lender. We recommend speaking to a bank or mortgage advisor about what they offer.
But generally speaking, the more you borrow, the more it will cost you. You may see interest rates for bridge loans come in around Prime +3-4% and you may also find some set-up or legal administrative fees.
It’s definitely something you’ll have to budget for!
The bottom line:
If you can manage to line up both your purchase & sale closing dates, you can avoid bridge financing altogether. Carrying a bridge loan has risks and costs that you may want to avoid altogether.
However if you absolutely need to set up this type of temporary financing, we recommend speaking to a mortgage professional as soon as possible to learn about your options. They’ll be able to find you the best solution to bridge the time between closing dates.
