Life often deviates from our plans, especially in the realm of real estate. Ideally, when purchasing a new home, most individuals prefer taking possession of the new property before vacating the old one. This smoother transition allows time for enhancements like painting or renovations before settling into the new space.
However, it can become complex: many rely on funds from selling their current house to gather the down payment for the new home. This is where bridge financing plays a crucial role.
Bridge financing functions as a means to bridge the financial gap between the confirmed sale of your current home and the definitive commitment to buying your new home.
It permits you to tap into the equity of your existing property, which you can then apply towards the down payment on the property you intend to purchase. But here’s the catch: securing bridge financing mandates a firm sale on your existing house, meaning all conditions must be removed.
Without a sold home, obtaining bridge financing becomes challenging because lenders lack a concrete basis to calculate your available equity and ascertain your ability to afford the new property.
For most individuals, it’s advisable to sell your existing home before acquiring a new one, primarily because:
Property values fluctuate, and your home’s worth is determined by what someone is willing to pay now, not past sales or future estimations.
- The proceeds from your current home are pivotal in covering the down payment for your new property, as well as renovations, moving expenses, and determining how much mortgage you qualify for.
However, if your existing home is sold, yet its closing date falls after the closing date of your newly purchased property, bridge financing becomes a viable option:
- Not all lenders offer bridge financing, so it’s crucial to work with a mortgage agent to find a suitable lender.
- Bridge loans typically entail higher costs than traditional mortgages, often involving rates like Prime + 2-5%, along with an administration fee.
- Normally, bridge loans have a restricted timeframe, usually around 90 days.
What if your home hasn’t sold? Banks won’t extend a bridge loan without a firm sale agreement, leading you to explore private financing:
- Private loans hinge on having sufficient equity in your current property to qualify.
- They generally come with high-interest rates, ranging from 7-15%, and require upfront lender and broker fees, varying based on specific factors like loan duration, amount, credit status, property location, etc.
- While expensive, private financing might be a more cost-effective alternative than reducing the purchase price of your existing home significantly to expedite its sale.
Regular banks don’t offer this type of financing; instead, specialized mortgage agents with access to private lenders handle bridge and private financing.
When the timing of buying and selling homes doesn’t align, seeking professional guidance is advisable rather than attempting to navigate these intricacies alone.