Bridging the gap
So you have sold your home and purchased another one but the closing dates aren’t the same.
This could be out of choice, or it could be a result of purchase / sale negotiation. Regardless you will need either bridge financing or temporary housing.
If you are closing on your CURRENT home BEFORE you take possession of your new home, then you need a place to stay in the interim.
But, if you are closing on your NEW home BEFORE the sale of your current home – you will need a bridge financing.
Put simply, a bridge loan is a short-term financing tool that helps purchasers to “bridge” the gap between old and new mortgages by allowing you to tap the equity in their current residence as a down payment, while essentially owning two properties concurrently as they wait for the sale of their existing home to close
You have heard that Bridge Financing can be complicated and costly!
There are certainly rules around Bridge Financing & each lender has their own policies so it is important you review your individual lender policies & ensure you can obtain the interim financing before you firm up on the Agreements to Purchase & Sale.
What you need to know!
- A firm Agreement to Purchase new home and firm Sale Agreement on current home is a necessity. These are the pillars at each end of the bridge.
- This is a form of interim financing so most lenders don’t like to bridge for more than 60-90 days & a maximum amount maybe applied.
- If the Bridge is for a longer period of time OR for a large amount, the lender may register a second mortgage against your current home. In this event, additional fees will be incurred.
- You may have to qualify for the new home mortgage including the cost of bridge financing. This is generally not a problem, but if you are at the maximum debt service, it could be.
Cost of Bridge financing again varies by lender. Some charge an administration fee $250 – $400 range plus interest at Prime Rate + a percentage of interest ranging from P+2% to Prime + 6% range.
- As well, some lenders allow some of the closing costs to be added to the bridge financing, and others do not., so ensure you are dealing with a qualified mortgage agent who is aware of every lenders products to ensure you receive the correct bridge loan to suit your needs.
- Bridge loans could cost you plenty if you don’t make sure you have worked with your Mortgage Broker, planned to make sure that the Lender Policies can be met and that the worst case scenario (you don’t have your home sold prior to closing on new purchase) doesn’t leave you unable to close on the purchase.
- You will need to have to money for the deposit with the offer and closing costs on the new home. If you don’t have the cash readily available, then you can borrow money but you will need to qualify for your mortgage with this loan.
- In summary, Bridge Financing can make life easier and it isn’t that expense when you consider the total cost of the Real Estate transactions but it can be complicated, so plan ahead.
- Using the services of a professional, knowledgeable Broker to make sure that you will meet the lender requirements & you have a backup plan is a necessity. The only surprises you want on closing day are pleasant ones!