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Today, Mortgage Jake tells us all about bridge loans.
Sometimes, when you sell your existing home and buy a new one, the closing dates (the dates you give and take possession of a home) don’t match. Let’s say, you get possession of your new home on August 5th, and your current house closes on August 25th. How do you pay for your new home if you don’t yet have the money from the sale of your current home? Bridge financing.
What is bridge financing?
Bridge financing is 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.
How does bridge financing work?
You must sell your current property “firm” at least five business days before your new purchase closes. What does “firm” mean? Your sale has absolutely no conditions left, including appraisal, financing, inspection, or status. Nothing. If your sale is conditional, the lender can’t lend you your equity because they can’t guarantee that your property will sell.
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.
How much bridge financing can I get?
The typical formula for a bridge loan is:
Down Payment LESS the 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.
How much does a bridge loan cost?
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.
Bridge Loan Example: $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.
Should I get a bridge loan?
If you can avoid bridge loans, 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.