In life, things rarely go as planned. This is especially true when it comes to real estate, so we have bridge financing to help us. When it comes to buying a new home, most of us would like to take possession of it before having to move out of the old one. This makes moving a lot easier and allows time for painting or renovating prior to moving in. Unfortunately, the transition is not always that smooth.
What is Bridge Financing?
Most people need money from the sale of their existing property to come up with a down payment for the new purchase. This is where bridge financing comes in. It allows you to ‘bridge’ the financial gap between the firm sale of your current home and the firm commitment to purchasing your new home.
What are Bridge Loans?
Bridge loans are short-term solutions that range from 90 days to 12 months, with an average of six months in length. This allows you to access some of the equity in your existing property and put it towards the down payment of your new home. However, to be eligible for a bridge loan, a firm sale agreement MUST be in place on your existing home. This means that all subjects have been removed. A purchase agreement for the new home will also be required to verify the amount needed.
If you have not yet sold your home, you will not be eligible for bridge financing, as the lender needs to accurately calculate how much equity you have available and if you can afford your new home.
If you have a firm sale and are considering bridge financing, it is important to understand that unless you can qualify and pay for two mortgages, you should always sell your existing home first. There are a couple of reasons for this:
1. Property values are constantly changing. You won’t know how much money you have until you sell your home. Past sales and future guesses don’t count!
2. You need the proceeds from your existing home to help pay for the down payment on your new home, as well as renovations, moving costs and to determine the size of mortgage you qualify for.
If you have sold your existing home but the closing date is after the one on the new property, bridge financing will likely be your best option. However, not all lenders allow bridge financing. It is important to consider whether or not you think you need it so you can ensure you sign with the appropriate lender. We will help you find a lender that provides the options you need.
Costs of Bridge Financing
It is important to mention that bridge financing typically costs MORE than your traditional mortgage. It is best to expect the prime rate plus 2-4%, as well as an administration fee. In some cases, if you require a loan over $200,000 or a loan for more than 120 days, your lender may register a lien on the property until the loan is repaid. In order to remove this lien, you will need to consider the added costs of paying for a real estate lawyer.
Private Financing
If you have purchased your new home and are closing the deal, but your existing home has not yet sold, you would not qualify for bridge financing but could consider a private loan. Private financing is expensive, but is generally a more affordable option. Often, if you need to sell your property first, you may be pressured into reducing the sale price and losing thousands.
Private loans do have a much higher interest rate than traditional mortgages, which averages anywhere from 7-15%. The costs associated with a higher interest rate is in addition to an up-front lender fee and potential broker fee. These amounts will vary based on your specific situation with consideration to the loan term, amount, loan-to-value ratio, credit bureau, property location, etc.
When it comes to bridge financing and private lending, don’t waste time trying to figure it out on your own. Give us a call and we will help you determine your best option!