Are you ready to make the leap and buy your dream home, but worried about the closing dates not matching up? No need to fret, because I’ve got the scoop on bridge financing, the temporary loan that will make it all possible.
Picture this: you get possession of your new home on August 5th, but your current home won’t close until August 25th. How on earth are you supposed to pay for your new home without the money from the sale of your old one? That’s where bridge financing comes in!
So, what exactly is bridge financing? It’s a temporary loan that covers the period of time when you have two different closing dates – your purchase closes before your sale closes – and you need to borrow the equity from your sale in advance of actually getting the money.
Here’s how it works: you must sell your current property “firm” at least five business days before your new purchase closes. And what does “firm” mean, you ask? It means that your sale has absolutely no conditions left, including appraisal, financing, inspection, or status. Nada. If your sale is conditional, the lender can’t lend you your equity because they can’t guarantee that your property will sell.
Pro-tip: you should try and have closing costs saved up because some lenders won’t lend you bridging funds to close unless you have a really good cash float left over after the sale.
Now, let’s talk about how much bridge financing you can get.
The typical formula for a bridge loan is:
Deposit you submitted with your offer
Bridge Loan Amount
(assuming you have at least this amount from the sale, coming to you).
Before you can apply for bridge financing, you need to know how much you’ll be getting from the sale after all the expenses. Note: lenders estimate high closing costs for the sale (usually 5-7% legal fees);
Typically, bridge loans are provided for a maximum of 60 days.
But how much does a bridge loan cost, you ask? Well, the more you borrow, the more it’ll cost you. Typically the interest rate for a bridge loan is Prime+ 3-4%, and there are sometimes set-up and legal fees too.
For example: a $100,000 bridge loan for 20 days = $18.85/day or $667.12 for the 20 days.
Some lenders will also charge legal fees if the dollar amount you wish to borrow exceeds $150,000.00.
Now, here’s the big question: should you get a bridge loan? If you can avoid bridge loans, that’s great! Save the money to fund the downpayment you need or sell/buy on the same date. Carrying a bridge loan does have risks and costs, not to mention, the risk of not having enough money to close. That’s the #1 nightmare we all want to avoid.
However, if you need a bridge loan, literally almost every prime lender (lender with good rates) offers them. Alternative lenders (lenders with higher rates and fees) charge much, much more for bridge financing, so be careful! And talk to someone who knows mortgages inside and out before making your decision of when to sell (and buy) your property.
I hope this helps you navigate the world of bridge financing with ease. Remember, buying your dream home should be exciting and stress-free, and with a little help, it can be!