The in’s and out’s of Bridge Financing
Last month, I gave an outline of your options if you’re moving up, down, or sideways. This month, I wanted to focus on what happens if you gain possession of you house before a new Buyer takes possession of yours. (NOTE: If you missed last month’s newsletter, you can read it here!)
NOW, timing the purchase of your new home before or after the sale of your current home can be stressful, especially when you’re trying to line up possession dates. However, whether you choose to or not, if you are taking possession of your new home before you have to leave your current one, as long as you have a firm sale in place, you can consider a Bridge Loan to ease some of that stress.
WHAT IS A BRIDGE LOAN?
A Bridge Loan is a short-term financing solution that allows you to tap into the existing equity in your current home and use it as the down payment for your new home when the possession of your new home takes place before you need to leave your current home.
HOW IT WORKS:
First off, you should speak with a Mortgage Associate to determine how much equity you can pull from your home, how much you qualify for, and to build a plan that takes everything into account. Your Mortgage Associate can also calculate to see if you qualify to service two mortgages in the event that a worst case scenario plays out and the sale of your home falls through.
Next, you must have a guaranteed, firm sale on your property. This means that possession can still be quite far out but also that both you and the Buyer must have lifted conditions on the sale of your home.
Next, you must qualify for the Bridge Loan. Generally, as long as your credit beacon is quite high (ie. 680+) and if you have been approved for your mortgage, you will likely be approved for the Bridge. However, if there are any liens on your current property OR the names on title for your current property don’t match those going on your new property (ie. parents with child or different situations with spouses) OR one of the properties is not MLS listed, Lender exceptions will be required and there is a possibility your Bridge Loan may be declined even though the same Lender had approved your mortgage.
Also, something to keep in mind, Lenders will usually only “bridge” your financing for 30 to 90 days and sometimes, the Lender’s fees may change based on the time of the Bridge as the longer a bridge, the more risky it can become.
WHAT DOES IT COST?
Typically, Bridge Loans will cost you:
1. $250 to $500 in Lender administrative fees;
2. Prime + 2.0% to Prime + 5.0% of interest on the money you borrow (for the time you borrow it) NOTE: These rates are a bit higher than your mortgage because there is more risk to the Lender as, even with a firm sale, the sale of your property could fall through; and
3. $200 to $400 for Lawyer fees.
Then, on the day you complete the purchase of your new home, you will be required to sign a Letter of Direction and Irrevocable Assignment of Funds, which is basically a promise that says when your home’s sale completes, the net sale proceeds will go to paying off the Bridge Loan FIRST before any of the money is provided to you.
Of note, on very large loans or on bridge loans that expand very long stretches of time, a Lender may require the Lawyer to register a collateral charge on the property you are selling. This is fairly rare but if it happens, this will likely incur extra legal fees.
THE MATH – AN EXAMPLE:
The amount of funds you will need for a Bridge Loan = (the Purchase Price of the new home) MINUS (your Initial Deposit + the Mortgage you will be getting for the new property). In other words, a Bridge Loan provides the extra money you need until the sale of your current home is complete.
For a $400,000 purchase where your new mortgage will be $260,000 and your initial deposit is $10,000:
Therefore: Your Bridge Loan = $400,000 ($10,000 + $260,000)
A bridge loan for $130,000 for 28 days at 6% comes to $21.36/day or $598 in total PLUS your Lender admin and Legal fees.
As you can see, Bridge Loans can be quite inexpensive!
There are several benefits to obtaining a Bridge Loan such as:
- If you want to do any re-painting, upgrades to your home, or just do a deep clean BEFORE you move all your furniture in; and
- Allows you to reduce stress of the move by having a few days to move everything over and clean your old house.
- Bridge loans can only be offered by the Lender that holds your mortgage;
- You need a FIRM sale to qualify;
- The amount of the loan can only be EQUAL to the remaining down payment needed after the initial deposit;
Lastly, always, always remember that you will still need enough cash to put down your initial deposit!
If you’re thinking about moving up, down, or sideways and have any financing questions, I’d be happy to answer them all. Call me at 780-863-0700 to see what you qualify for today!