The home buying experience looks different for all Canadians. While some may be entering the market for the first time, others may have a previous home they need to sell before they can move on to purchase another. Buying a home always gets more complicated when you need to sell one first. If you’re on the hunt for a new home, but you still need to sell your current one, you’ll want to learn more about bridge loans and how they can help you “bridge the gap” between both transactions.
How Bridge Loans Work In Real Estate Transactions
Bridge loan terms are short term, typically 90 days – 12 months in duration. In order to qualify for this type of loan, a firm sale agreement must be put in place for your existing home. Typically, a lender will offer a bridge loan to a borrower with excellent credit and a low debt-to-income ratio. Bridge loans essentially roll the mortgages of two homes into one, which gives the buyer some flexibility while they wait for their current home to sell. Do keep in mind that in most cases, lenders will only offer bridge loans worth 80% of the combined value of the two properties. This means that as a borrower, you’ll need to have at least 20% equity built up in your current home, or ample cash savings on hand, in order to fill the gap.
When To Use A Bridge Loan
With today’s real estate market being hotter than ever and potential buyers constantly entering into bidding wars, this type of loan can be well suited if you need to make a quick decision in a fast-paced market, when you don’t have time to worry about your current home selling first in order to snag your new dream home.
A bridge loan may be a good fit if you:
– Aren’t scheduled to close on the sale of your current home before closing on the new house
– Have chosen a new home and are in a seller’s market where houses sell quickly
– Want to purchase a property but the seller won’t accept an offer that’s contingent on the sale of your current home
– Can’t afford a down payment on the new property without first selling your current home
– Want to close on a new home before selling your current home
Bridge Loan Costs
Bridge loans offer the convenience of short applications, quick approvals and faster access to funding than conventional financing. In exchange for this convenience, you can expect relatively short terms (typically 90 days – 12 months), higher interest rates and larger fees. The interest rates you get with a bridge loan will depend on your creditworthiness and the size of the loan.
When it comes to costs, you can expect to pay a variety of fees associated with closing. Typically, these items will range from 1.5% – 3% of the total loan value and will include:
– Appraisal fee
– Administration fee
– Escrow fee
– Title policy cost
– Notary fee
– Loan origination fee
It’s also important to note that interest repayment on bridge loans can vary depending on the lender. Some will require borrowers to make monthly payments, while others may prefer lump-sum interest payments that are made at the end of the loan term or are taken from the total loan amount at closing. Be sure to ask about repayment terms upfront so you have a clear understanding of what will be required of you as a borrower.
Pros And Cons Of A Bridge Loan
As with any loan or financing option, there are always pros and cons to consider before determining if it’s the right fit for your specific needs:
Pros Of A Bridge Loan
– Allows you to buy a new house without worrying about selling your current one first
– Lets you use the equity in your current home towards a down payment for a new one
– Gives you more time and flexibility to sell your current house in a fast-paced market
– Provides you with the funds and extra time to make any necessary upgrades to your new home before you actually move in
– Most bridge loans do not have prepayment penalties
– Typically a much faster process than seeking out conventional financing
Cons Of A Bridge Loan
– Your options will vary greatly when it comes to terms, costs and conditions so you need to give yourself time to shop around and compare your choices
– Interest rates can be higher than those you’d encounter with conventional financing
– Since bridge loans require you to take on a new loan with a typically higher interest rate and no guarantee that your current home will sell, they can come with a much higher risk
– Bridge loans may also require collateral due to their short-term high-risk nature
– Lenders will typically require borrowers to have at least 20% home equity
Bridge Loan Alternatives
If you need funds but don’t yet have access to a solution, a bridge loan may be a good fit, but that doesn’t mean it’s the most ideal solution for everyone. Having a better understanding of your alternative options means you can compare and see which choice may be the best one for you based on your personal situation.
Home Equity Line Of Credit (HELOC)
A home equity line of credit (HELOC) is a loan that’s structured like a standard line of credit. If you have equity, you could draw on the HELOC for your down payment on the new home. It’s important to keep in mind that a lender will not approve this type of financing if you’ve already signed a purchase agreement, so this is an option you would need to consider ahead of time.
Temporary Housing Options
To avoid bridge financing, try to align the closing date of your existing home and the purchase of your new one. But if you haven’t found your new dream home in time, you could ask to stay with family and friends or rent a place temporarily. While not as common, it’s also possible to suggest a rent back agreement if the new buyers of your existing home agree. Basically, you rent back your existing home from them until you close on the new property.
Move the Closing Date
Depending on the needs of both parties, you could ask the buyers of your home if they’d be willing to extend the closing date to align with when you would close on your new home.
The home buying experience looks different for all Canadians, but regardless of your situation, it doesn’t have to be complicated and scary. If you currently own a home but want to find something new, considering a bridge loan may be an important part of the process. As with any financial decision, it’s always wise to seek out professional help and be sure to weigh all the options to determine which one is best suited for your personal circumstances. Looking for deeper insight? Want to learn more about your financing options? Reach out to our team at Rocket Mortgage to get the ball rolling!