What Is Bridge Financing?
Buying a new home when you have an existing home to sell can create some financial challenges if you don’t have bridge financing in place.
Perhaps your down payment is locked in equity on your current home—how do you unlock that equity to apply the funds to your new home purchase? A bridge loan literally “bridges the gap” between the sale of your existing home and the purchase of your new one.
As a short-term loan, bridge financing allows you to utilize the equity in your current home before the funds from the sale are available. These loans are typically between three to six months in length. However, they can be as short as 90 days or may be extended past six months depending on the lender and if any applicable conditions are met.
Interest rates on bridge financing are typically higher than standard loans, but the shorter the term on the loan, the less interest you’ll incur.
A bridge loan is repaid in full upon the closing of your existing home sale.
Advantages of Bridge Financing
There are some great advantages when it comes to bridge financing:
- Allows you to make quick decisions about a new home purchase in a hot housing market.
- Gives you the power to accept the best offer on your current home, regardless of the closing date.
- Allows you to access your hard-earned home equity as a down payment prior to the closing on your home’s sale.
- Makes the transaction of buying a new home less stressful, giving you more financial flexibility.
Potential Disadvantages of Bridge Financing
Of course, we have to mention the cons with a bridge loan:
- Bridge loans are typically at higher interest rates than standard loans.
- Terms and conditions may vary between lenders.
- Although you may have a firm sale on your existing home, until that sale closes and funds are transferred, there’s a risk of taking on a bridge loan and your sale falling through.
- If your bridge loan is extended to a longer term – typically more than six months – your lender may put a lien on your home to ensure they’re repaid on sale.
Typical Conditions to Qualify for Bridge Financing
To qualify for a bridge loan, lenders require a firm sale on your existing home. This includes the purchase offer from your buyers and any supporting documentation relevant to the sale. In addition to this proof of sale, you may also need to demonstrate your qualification for a mortgage on your new home. Your lender needs to be sure the loan will be repaid when expected, so these documents will show you’re ready to make the transaction as smooth as possible.
You will be restricted to the type of lenders offering these loans. Smaller lenders and brokerages may not offer this product, leaving your options limited to major banks and financial institutions. It may be more difficult to qualify for a bridge loan by a major bank if your mortgage is through a smaller lender.
What Does a Bridge Loan Cost?
As mentioned above, the interest rates on bridge loans are generally higher than standard loans or mortgages, but there are also other costs to consider. Additional legal fees may apply, as there is an extra transaction to process between your current home sale and the purchase of your new home.
There may also be an administrative fee or fees applied by your lender to handle the processing of your new bridge loan. Typically, these fees add a few hundred dollars to the cost of your bridge loan. When combined with the interest incurred on the loan, the average homeowner will see about $1,000-$2,000 in additional fees to take advantage of bridge financing.
Alternatives to Bridge Financing
Of course, there are alternative options to financing your down payment. Since bridge loans can get expensive despite their short term, you may want to consider other methods of obtaining your down payment before relying on bridge financing. A financial gift from a family member, accompanied by a gift letter could work, or other types of financing such as a Home Equity Line of Credit may be an option.
If you have a Tax-Free Savings Account, it may be worth making a withdrawal for the purpose of applying the funds toward your down payment. As this withdrawal is tax-free, there are no applicable penalties for using these funds.
It can be a bit daunting to buy a new home when you have an existing home to sell. The challenges of timing the financial transaction can be troublesome, but there are options available, such as bridge financing, to make this experience less stressful. Be sure to do your research and consider all options before taking advantage of this type of loan to ensure it is the right choice for your financial future.
Photo credits: depositphotos.com
Photo by JESHOOTS.COM on Unsplash
About the Author:
At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers.
Learn more about:Sterling Homes - Home Builder in Edmonton