BRIDGE FINANCING – A SOLUTION WHEN BUY AND SELL DATES DON’T MATCH UP
If you want to sell your current home and use the proceeds as a down payment on a different property, what do you do if the closing dates don’t fall on the same day? More to the point, what do you do if you must close on your new home before you sell the old one?
In these situations, you’ll need a short-term loan to bridge the gap between the two transaction dates and the solution, appropriately enough, is called bridge financing. Here’s how it works for borrowers who are considering this option.
Let’s start by addressing a few common concerns. If you need a bridge loan, it does not alter or limit your ability to qualify for a mortgage in any way.
Also, you typically don’t need to qualify for bridge financing itself – the only, and critical, requirement is that you have an unconditional offer to purchase for the property you are selling.
It is almost always offered in combination with a traditional mortgage loan – your lender simply bridges your financing gap to help facilitate the overall transaction.
So, you would not have your main mortgage financing on your new home with a different lender than the one supplying the bridge funds.
In Toronto’s busy market, it is often prudent to purchase a new home first and then put your home on the market after you’ve found one. The reason? It’s an exceptionally strong seller’s market with multiple offers happening almost 80% of the time.
Many times, our buyers have put in offers on homes they liked and were beaten out by a higher offer. The buying process sometimes takes two to three months before you make a winning bid.
Imagine if you’ve already sold your home with a typical 60-day closing… if you’d sold first, you might find yourself homeless or feeling rushed to buy something you didn’t really like.
In situations like this, we always advise our seller / buyer clients to talk up front with their mortgage lender about arranging bridge financing so they understand the process perfectly.
Another frequent reason to bridge is if the home you’re buying needs some fix-ups before you move in… maybe painting, a new kitchen, hardwood floors installed etc. Since these are sometimes messy jobs and no fun to live through, many buyers prefer to get these jobs done before moving in.
So now let’s assume you buy a new property for $600,000 with a $50,000 deposit with your offer, and the sellers want you to take possession on October 12, which is 60 days away. You now immediately get your home listed and on the market for sale.
A week later, we get an unconditional offer on your existing home. The price is excellent ($350,000), in fact it’s higher than you anticipated, but the closing that the buyer wants is October 30th… 18 days after the purchase date of your new home.
Since the offer on your existing home is firm without conditions, your mortgage lender will love you and will work with you to set up the bridge loan.
On October 12th, your lender will advance a total of $550,000 (Purchase price of $600,000 less your $50,000 offer deposit) to buy your new home. The interest rate for the 18 days is typically Prime + 2-3% and, because it’s for such a short time, doesn’t typically amount to very much of an expense.
Then on October 30th, once you’ve closed on your old home, the net funds from that sale are applied to pay down the $550,000 bridge loan and you’re left with your final first mortgage amount.
Lenders typically expect a gap of no more than 30 days between your buy and sell dates, although bridges for longer periods may be offered by some lenders on an exception basis.
Keep in mind that, on balance, bridge loan rates will have far less impact on your overall financing costs than mortgage rates because they only apply on the shortfall, and they are only in place for a brief period.
If you have borrowing room on any existing lines of credit, most lenders will ask you to draw down these lines first, before then bridging the remaining gap.
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 directing your lawyer to use your net sale proceeds to pay off the lender’s bridge loan before taking any money for yourself.
On larger bridge loans your lender may go a step further and require that a collateral charge be registered on the property you are selling (this is a slightly more expensive step that achieves the same basic end).
While not all lenders offer bridge financing, an experienced, independent mortgage broker will have access to several who do.
Instead of worrying about lining up your closing dates on the same day and trying for perfection in an imperfect world, use bridge financing as an easy and cost-effective tool when coordinating buying and selling transactions.
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