In most cases, the rule of thumb is that you should sell your current home before purchasing a new home; but it doesn’t always work out that way for many people. In fact, many buyers are finding that in this hot housing market they have to make quick decisions and that may include purchasing their dream home with a different closing date than their current home.
If you’ve purchased your new home, and have a different closing date the sale of your current home, a bridge loan will likely be required. Let’s take a closer look at why this is likely the best option.
What is a Bridge Loan?
A short-term financing option, a bridge loan works to assist homeowners with two different closing dates. Another use for a bridge loan, which has gained in popularity, is to help homebuyers take possession of their new home to complete any necessary renovations or do a big clean as they stay in their current home until the closing date.
How Does a Bridge Loan Work?
Bridge loans are an affordable option, as they are short-term, generally allotted for up to 90 days. In order to determine the total amount of a bridge loan, lenders take the sale price of your current home and subtract the remaining mortgage balance and real estate fees. The remaining total is what will form the bridge loan, and will be the amount that is financed until the closing date of the current home. Most often than not, purchasers use a bridge loan as their down payment, which is repaid to the lender after the sale of their current home.
What Are The Costs Associated With Bridge Loans?
It is important to note that bridge loans are more expensive than a traditional mortgage, as they are short-term and carry greater risk to the lender. While interest rates vary from lender to lender, they are typically around Prime + 2.00-4.00%. In addition, there are your lender set-up and administration fees, and legal fees. Lender administration fees run somewhere from $250 to $500, depending on the institution. As well, legal fees vary depending on the lender and lawyer, and may range from $200-$500 on top of the regular legal fees for a purchase transaction.
How Do I Qualify For a Bridge Loan?
In order to qualify for a bridge loan, the homebuyer must have a strong credit history. If the homebuyer is having some credit issues, they may need to seek private lending options, which often means higher interest rates and fees. A firm sale of your current home is also a must in order to be approved for a bridge loan. Lastly, your lawyer must provide an undertaking to register the mortgage if things fall through with the closing of your current home.
Are There Risks To Bridge Loans?
While a bridge loan may be a great option for some homebuyers, there are still some things that one must consider:
- The homebuyer must qualify. In most cases, if the homebuyer can get a mortgage they can get a bridge loan, provided they have a strong credit history and good credit rating.
- Depending on the homebuyer’s credit history or lenders’ products, they may have to look to private lenders for a similar product.
- Not all lenders offer this product so if needed, make sure you approach a lender that will.
When considering a bridge loan, it is important to consult your mortgage specialist. This way you can create a plan that allows you to cover all your bases, from household cashflow to being able to carry two mortgages. This way you can be sure that you have both the equity and ability to service the debt, prior to purchasing the property and seeking a bridge loan. Contact one of our mortgage specialists today to see if a bridge loan is right for you or if there are other alternatives available.