Bridge Loans

If you’re looking to sell your home and purchase another, you may consider using the equity in your current home to help you purchase your new home. Unfortunately, whether you’re upgrading your home or downsizing, you’ll likely find that your closing dates for both the home you’re selling and the home you’re buying fall aren’t in sync. This often leaves people short on cash for a down payment as their money is still tied up in equity.  That’s where bridge loans come in. 

What Is A Bridge Loan?

A bridge loan is a short-term loan that helps homeowners purchase a new home by accessing the equity in their current homes. It basically helps “bridge” the gap between the time you buy your new home and sell your current home. That way you can access the equity in your current home immediately to purchase your new home, without having to wait to sell your home first. 

Bridge Loan Features

  • Term Lenght – Bridge Loans are short-term loans that can range between 90 days to 12 months or longer. 
  • Interest Rates – Interest rates for bridge loans are typically higher than regular mortgages. 
  • Repayment – No payment is required until your current home is sold or until the life of the loan has ended.

How Does Bridge Financing Work?  

When you decide to sell your home and buy a new one, it can be difficult to sell your home and buy a new one within the same period. Generally, homeowners will try to sell their current home first in order to use the money from the sale to help finance their new home. 

How Much Can You Borrow? 

When you apply for a bridge loan, the lender will assess how much they can lend to you. The maximum you can qualify for is the amount your home is worth minus the balance left on your mortgage. 

For example, if you owe $350,000 and your home is valued at $500,000, then you could be eligible for $150,000. Do keep in mind that, the lender will also subtract the closing costs from your bridge loan amount. 

Learn how to build equity in your home.

When Do You Repay The Bridge Loan? 

Once your current home has been sold, the proceeds from the sale can then be used to pay off the bridge loan. If you’re unable to sell your home before the bridge loan term ends, you’ll be responsible for your current mortgage payments, the mortgage on your new home and the bridge loan. 

Check out our infographic for a visual look at how a bridge loan works. 

Watch mortgage broker Dave Johnson explain what a bridge loan is and when they should be used.

Where Can You Get A Bridge Loan? 

Depending on your financial health and the equity in your home, you may be able to get a bridge loan from a bank or a private lender. 

Banks 

Many banks and other traditional financial institutions offer bridge loans, however, they often have strict approval requirements that potential borrowers must meet. This can make it difficult for individuals with bad credit to qualify for a bridge loan. Generally, banks will look at the borrower’s credit score, income, employment, and equity in their home.  

Private-Lenders

On the other hand, there are private lenders who offer bridge loans. These lenders tend to have lower requirements, with some only requiring that you have equity in your home. These private lenders are often the best choice for those with poor finances and low credit scores.

Do you know what the minimum credit score required for mortgage approval is?

Pros And Cons Of Bridge Financing

Bridge financing has both pros and cons. Be sure to consider both, to see if a bridge loan is a good option for you. 

Pros Of Bridge Financing

  • Fast Access To Cash – A bridge loan provides borrowers with quick cash they can use to help them purchase their new home. 
  • Bridges the Gap – Selling your current home and buying a new one within the same period is difficult. A bridge loan allows you to purchase a new home without first having to sell the old one. 
  • Lower Requirements – Bridge loans typically have lower requirements than a regualr mortgage. Most lenders mainly require a copy of the Sale Agreement and the Purchase Agreement.

Cons Of Bridge Financing

  • Costly – Bridge Loans typcially have higher rates than a regular mortgage. 
  • Requires Equity – In order to get a bridge loan, you need at least 20% equity in your home. If you’ve recently purchased your home and haven’t yet built 20% equity, you are unlikely to qualify for a bridge loan. 
  • Two Mortgages – If you fail to sell your home during the bridge loan term, you’ll not only be stuck with two mortgages but a bridge loan as well. 

When Can A Bridge Loan Work For You?

Bridge Loans can be a good option if : 

  • Loan Rejections. If you continue to be rejected by your bank because of credit issues, a bridge loan will help you work to correct those issues while still getting the money you need.
  • You Don’t Want To Lose Your Home – If you’ve found a great house and don’t want to lose it to someone else while you try to sell your current home, a bridge loan can provide you with the funds to carry it through. 
  • Your Closing Date Is Not Aligned – If you’re unable to close your the sale of your home before the closing of your new home, a bridge loan can help 
  • The Sellor Won’t Accept Your Conditions – If you make an offer on a house that includes the sale of your house as a condition, some sellors may reject your offer. A bridge loan will allow you to buy the house before the sale of your home. 

Check out what is a Power Of Sale for a mortgage.

Bridge Financing FAQ

What do I need to qualify for bridge financing? 

Requirements for a bridge loan depend on the lender you choose to work with. While some lenders will evaluate your credit score, income and overall financial health, other lenders may put more importance on the equity in your home. Generally, you should qualify so long as you have a copy of the Sale Agreement and the Purchase Agreement.

Does bridge financing require a deposit? 

You won’t be required to make a deposit, however, there are certain fees that your lender may charge when you get a bridge loan. There’s usually a set-up fee that can cost around $400 – $500. Other fees you may be charged are legal fees which can range between $200 – $300. 

Can I get a bridge loan if I have bad credit? 

Yes, while it may be hard to get one with a bank, many private lenders are less risk-averse than banks, and thus more willing to work with credit-constrained individuals. 

Bottom Line

If you think a bridge loan from a private lender might be a good solution for your current situation, then apply today to see if you qualify.

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.

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