Bridge Loans Explained

If the property that you’re currently living in and are selling, is set to close only after you close and take possession of your next home (the one you’re buying), then that can make it difficult to come up with the down payment for the property you’re purchasing. This is where a bridge loan, or bridge financing, comes into play.

In the majority of instances, most homeowners need to sell their existing property to make the down payment for their new home, and bridge financing gives you the opportunity to make a down payment without being forced to wait until the sale of your current home closes.

How do bridge loans work and what are the rules?
Provided your current home has a firm sale on paper, you’ll find that most mortgage lenders and banks will loan you the required down payment to close your existing home, as well as the remaining money from the mortgage that you’ve been approved for. The following provision should be in place for you to be able to take advantage of bridge financing:

• A firm sale on your current home, and confirmation of qualification for the new mortgage

It’s also important to remember that a bridge loan is a short-term solution for the down payment, and that bridge financing terms apply to the down payment and not the mortgage. While bridge financing can be immensely helpful, it can get costly, so try to use it for a short period of time.

What are the costs associated with bridge financing?
There are three main price elements associated with bridge loans, they are as follows:

• Legal costs – these typically range from $200 to $300
• Lender fee – this typically ranges from $400 to $500
• Interest rate (prime + 3% to 4%)

Generally speaking, a bridge loan will cost you somewhere between $1,000 and $2,000, although extenuating circumstances may bump this up, so beware. Talk to a professional mortgage advisor or broker for more guidance.

What can you do other than seek a bridge loan?
Unfortunately, if the sale and purchase of your existing and new homes cannot be made to coincide with one another, then you’ll need to find the money for the down payment from somewhere. While some individuals may have enough money in savings to prevent them from having to use bridge financing, or be able to access a gift from a family member, most will not, and a bridge loan will be their only solution.

The entire mortgage process can be confusing, costly and longwinded, so it pays to work with a professional broker or mortgage advisor to help you save money wherever you can, and to make intelligent financial decisions that take your personal circumstances into account, and are in line with your best interests.