Buying your next home may come with new challenges than when you bought your first home. Many homeowners will use the home equity they built for a portion or all of the down payment on their next home.
When purchasing a home, you are required to give the down payment funds to the lawyer before or on the day you take possession of your new home. If you are planning on taking ownership of your new home before losing possession of your current home, providing the down payment on time will be a challenge if you are using home equity.
A bridge loan, also known as interim financing, is a tool that helps buyers close the gap between purchasing a new home before losing possession of their existing home. Bridge financing makes funds available to cover the cost of the down payment when the closing dates don’t coincide. It provides the money required to purchase the new house before receiving the sales proceeds from the existing house.
To qualify for bridge financing, there needs to be an unconditional sales agreement on the existing home. This is written up by a real estate agent. The bridge loan is secured by the current home. When the sale goes through, the loan is paid off with the sale proceeds. Equity needs to be available when the sale is complete to pay off the loan.
It doesn’t happen often, but the sale of your existing home can fall through at the last minute. When you are relying on the sales proceeds to pay off the bridge loan, this will create a problem. When a bank is approving you for interim financing, they will take into consideration a worst-case scenario. You may not qualify for a bridge loan if you are unable to keep the loan long term until your existing home does sell. If there are other debts that need to be paid off as a condition of your mortgage approval, interim financing may not be an option. The debts may need to be paid off from other sources before the new purchase date. Talk with your mortgage broker about your situation.
Lenders offer interim financing as a courtesy product to help clients during the transition period. It is not a standalone product. Because bridge financing is usually short term, lenders charge higher interest rates.
Unpacking boxes in your new home before giving up possession of your existing home can make moving less stressful. It gives extra time for you to move into the new house over the length of the bridge loan. This way your new home can be set-up before staying the first night.
If you think a bridge loan will help you when purchasing and selling a home, talk to us and see if it is an option that you can explore.