Taking Advantage of Bridge Loans

Many consumers get lost in the complex language of banking and loans.  We have a tendency to smile and nod and do whatever the lender advises us to do, so we don’t look foolish from our lack of understanding.  Fear not.  A bridge loan is a perfect example of a tool that people can use to transition from one home to another.  It’s not nearly as complicated as you might think.

What are Bridge Loans For?  When you are selling your home to buy another, you are likely using the money from the sale (equity) to make the downpayment on the new home.  You will apply for a mortgage for the amount you need to borrow for the new home.  (Purchase price minus down payment).  Everything is going according to plan, you find a buyer for your existing home and put in an offer for a new home.  The trouble comes when the closing dates don’t match on both homes.  Lets say your new home closes on the first of the month, but the house you’ve sold doesn’t close until the 14th.  You are now left owning two homes for a couple weeks.  

It’s a pretty big snag.  You can’t close on the new home without the downpayment from the sale of the old home.  This is where a bridge loan comes in.  A bridge loan is a short term mortgage that will cover the downpayment of your new home until the sale of your old home is complete.  Once your old home has sold, the money (profit from equity) goes straight to the mortgage lender to pay off the bridge loan.  

Conditions of a Bridge Loan:  There are usually a few general conditions that need to be met to qualify for a bridge loan.  

• The property you are selling must have a firm offer.  That means all conditions have been waived, so the sale is a definite go.  
• The property you are purchasing must also be firm.
• The loan to value on both properties combined should not exceed 90%, although exceptions can be made.  That means the total amount on loan for the two homes combined cannot be more than 90% of the value of both homes.  

When you are using a bridge loan, most financial institutions will not force you to make payments on the bridge portion until after the bridge has been repaid from the sale.  Often bankers will work out payments that will keep you from suffering a cash-flow crunch.  For example, if the interest on your bridge loan totals $300 for the two weeks you borrowed it, the lender will not require repayment until after both properties have completed the sale.  

While the interest rate on bridge loans can be expensive, it’s worth talking to your mortgage lender about.  The amount you pay in finance charges depends on the amount of time you need to bridge.  If you are planning a relocation or a big move, it can benefit you to bridge for a short while.  For example, move into your new house on Friday, bridge for the weekend, and complete the sale of your old house on Monday.  This gives you the weekend to move into your new home, and won’t be overly costly since it’s such a short term bridge.
For more consumer information about loans and mortgages you should read:  Top Five Questions About CMHC Insurance.