Bridge Mortgage: Buy a New Home Without Having Sold the Old One
You’ve found the home of your dreams. The only problem is you haven’t closed the sale on your existing property. And, you need the equity in your home to buy the new place. You can’t get the money until you sell your current home and close the deal, right? That’s not true! Fortunately, lenders are aware that dates don’t always line up perfectly in the world of real estate. There’s a solution: Bridge mortgages are available to cover the mismatches between selling and buying.
Plenty of good reasons to take out a bridge loan!
Many mortgage lenders offer a bridge mortgage for buyers whose home purchase will close before they sell their old house. A bridge mortgage functions much like any other bridge, allowing you to get from one place to another by covering a gap. In this case, the gap is the time between the two closing dates.
There are several reasons why you might need bridge financing. First, you might have to take a closing date on a new property before the sale of your home is complete to accommodate the vendor. You might want to have some time to get into your new home to clean it, make repairs or do renovations before you move in. Finally, the buyers of your home may have given you the best offer, but they can’t close the sale until after you take possession of the new property.
You can tap into most of the available equity in your home that you’ll be using to buy your new place before the sale of your home closes. You will own two properties and possibly carry two mortgages for a time. Once the sale of your home closes, your lawyer will forward the funds to your lender to pay off any outstanding debts against the property plus the bridge mortgage. Bridge mortgages typically have a time frame of anywhere from a few days to up to twelve months. The flexible time frames give borrowers the option to extend the closing date of their current home if they want to.
How to get your loan
It’s no secret that borrowing to buy real estate can be complicated. Qualifying for financing, choosing the right mortgage, and getting the best terms and conditions can feel like a part-time job. Needing a bridge mortgage makes the lending process a bit more challenging, but if you’ve been approved for a mortgage, the lender will already have most of the required information.
The first step is qualifying for credit. To be approved for financing, the lender will need to take a credit application, confirm your income, employment, assets, liabilities and do a credit check. You should take the time and check your credit score with a place like TransUnion and clean up any errors on your report.
Next, you’ll need to provide your lender with a copy of the Agreement of Purchase and Sale (APS) for the home you are buying, the Agreement of Purchase and Sale for the home you are selling and want to bridge, and a copy of the mortgage statement for the home you currently own. Having both Agreements of Purchase and Sale gives the lender the dates for the two closings to process the bridge mortgage. The APS documents contain the numbers they need to work with as well. The dates and numbers are required to do a bridge mortgage calculator.
The sale price and mortgage statement give your lender the information they need to calculate the amount of equity available to bridge. The purchase price of the new property tells them how much money you need to close the sale. The Agreements also confirm that the deal is firm, meaning all conditions for the sale and purchase have been waived.
How to calculate the value of your bridge mortgage
You need at least 20% equity in your home for a bridge mortgage. Lenders calculate the downpayment you need for the purchase by taking the purchase price of the new home less the mortgage amount you have qualified for. For example, if you bought a home for $650,000 and have a mortgage approval for $400,000, you need a downpayment of $250,000 to close the sale.
The Agreement of Purchase and Sale for the new property will let the lender know how much of a deposit you have made with the offer and will subtract that amount from the required down payment. So, if you have made a $25,000 deposit with the offer, you will now need a downpayment of $225,000.
Calculation: $650,000-$400,000=$250,000-$25,000=$225,000 (this should be the amount of the bridge loan)
In addition to the downpayment needed, the bridge mortgage calculation determines how much equity you have available in your home. The APS for the sale of your home will give the lender the amount of the sale price. The mortgage statement on that property will let the lender know how much to deduct from the sale price to calculate your equity. For example, if your new home closes February 10th and the sale of your existing home closes February 20th, you will need a bridge for ten days. If your home sold for $600,000 and the mortgage statement has an outstanding balance of $325,000, you will have $275,000 equity in your home, from which you must also subtract brokerage fees. This amount will be offered to you as a bridging loan.
For how long?
The purchase and sale closing dates give you the number of days you need the bridge mortgage. The maximum is normally 90 days. That said, talk to your lender if you need more time.
For example, if your purchase closes on February 10 and the sale closes on February 27, you’ll need bridge financing for 17 days. You will pay interest on the amount borrowed for the 17 days and bridge loan fees. Some lenders may have a minimum charge as well. If you don’t take the bridge financing for a certain number of days, you might have to pay a minimum bridge mortgage interest charge.
How much does it cost?
Fees for financing are one of the certainties of life; of course, you’ll have them! Bridge mortgages charge interest on the monies borrowed for the time borrowed or have a minimum charge. The rate is usually a floating rate of prime +2% or more. Prime is the Bank of Canada prime lending rate, which is 6.95% at the time of writing.
Bridge mortgages have other fees, too, in addition to interest. Typical charges associated with bridge loans are:
- Bridge mortgage application fee
- Bridge mortgage registration fee
- Discharge fee for the bridge mortgage once the sale closes
- Lawyer’s fees
You will get a document stating the amount borrowed, the interest rate, the date the bridge mortgage is due, and all the additional costs associated with the bridge financing. The bridge mortgage agreement will disclose everything, so you’ll know the exact amount you must pay to discharge the bridge mortgage fully. Once the sale of your property closes, your lawyer will deduct all funds owing against your property, including the bridge mortgage, and forward those funds to the lender holding your mortgage and bridge.
What happens if you don’t have a firm offer on your home, but you still want a bridge mortgage? Or if you have a bad credit score or you can’t confirm your income? Purchasers will often arrange financing through private lenders, real estate investors, or subprime lenders. They can be more flexible with their lending criteria, but their rates are often higher than a conventional lender.
Pros
Bridge mortgage financing offers several benefits for buyers who have discrepancies with their purchase and sale closing dates. In a hot housing market, competition for homes can be fierce. If you can secure a bridge mortgage, you might not lose a property you really want. You canstill take possession of the house without inconveniencing the vendors.
Another advantage is that you don’t have to take a low offer on your home. Knowing you can bridge can give you extra time to sell to make sure you get a great offer on your property. You’ll avoid the stress of having to vacate a home and move into another one on the same day. Same-day moves are a lot of work and can be stressful. Having some extra time might make the process a lot easier.
You can use the extra time to clean the new home, redecorate, make repairs, or renovate it while it’s vacant. It’s a great feeling to have everything done before you move in. A bridge mortgage will take a bit of time to set up. However, most lenders have experience with these loans, so the process is pretty straightforward.
You don’t need to make payments on a bridge mortgage. The loan simply accumulates interest that you’ll pay once the sale of your home closes. Not making extra payments is a great feature because some borrowers could find it challenging to manage an additional payment. Additionally, bridge mortgages don’t have penalties for paying them off as fixed mortgages do.
Cons
Well, the most obvious sticking point is the cost. It seems there are fees on top of fees to process bridge financing. The longer you take the bridge mortgage, the more interest you’ll pay. The interest rate is often a floating rate, meaning that as the prime rate changes, so does your rate. If the prime rate is declining, that can be a good thing. But, the lending rate can increase quite quickly.
Another potential pitfall is that an Agreement of Purchase and Sale is just an agreement. Once buyers waive their conditions, they are contractually obligated to buy your home, but sometimes things happen. If they change their mind or didn’t qualify for financing after all, you’re now stuck with two homes. While this is an unlikely scenario, it can still happen. Having to list your property again if the original deal falls through will definitely add stress to the process.
If you think you might need a bridge mortgage or want the option of getting one, talk to your lender. Your lender will let you know what they need to set up bridge financing for you. Once your lender has all the necessary information, your bridge loan can be set up quickly and easily.
