You’ve discovered your dream home in Barrie and are eager to put the “SOLD” sign up before it disappears from the market. However, there’s a small obstacle: your current house hasn’t sold yet. Or you intend to undertake significant renovations on your new home and want to avoid the hectic mess before moving in. Regardless of the situation, a bridge loan could be the perfect solution for you.
What is a bridge loan?
A bridge loan is a temporary financing option designed to assist homeowners in bridging the gap between the sale of their existing home and the purchase of a new one. It allows you to utilize the equity in your current home as a down payment for your next property while you wait for your home to sell.
Typically, bridge loans have terms of around six months, although they can range from 90 days to 12 months or even longer. To qualify for a bridge loan, you must have a firm sale agreement in place for your existing home.
These types of financing options are most prevalent in hot real estate markets where bidding wars are common. They offer a solution when you need to make a prompt decision about your dream home without worrying about whether your existing home has sold. Once you do sell your current home, you can use the proceeds to repay the bridge loan along with any accrued interest.
If you’re considering a bridge loan, it’s important to conduct thorough research and understand whether it aligns with your specific needs or not.
How does a bridge loan work?
Bridge loans, also known as interim financing, gap financing, or swing loans, serve the purpose of bridging the gap during times when immediate financing is needed but is not yet available. It’s up to the lender to tailor them to suit various situations.
It’s also important to note that bridge loans generally come with higher interest rates compared to other credit facilities like a home equity line of credit (HELOC).
Lenders typically require borrowers to have excellent credit and low debt-to-income (DTI) ratios. These loans combine the mortgages of both the old and new properties, granting flexibility to the buyer while they wait for the sale of their previous home. However, lenders usually offer bridge loans worth up to 80% of the combined value of the two properties, requiring significant home equity in the original property or substantial cash savings in the bank.
Bridge loans vs traditional loans: Which do I need?
Bridge loans offer a quicker application, approval, and funding process compared to traditional loans. However, in return for this convenience, bridge loans typically come with short terms, high-interest rates, and substantial origination fees so be sure to do your homework and read all the fine print before signing anything.
Borrowers often accept these terms due to their need for fast and convenient access to funds. They are willing to pay the higher interest rates since they understand that the loan is intended for short-term use, and they plan to repay it quickly once they secure low-interest, long-term financing. It’s worth noting that most bridge loans do not impose repayment penalties either.
What are the benefits of using a bridge loan?
Helps you buy a house before yours sells
A bridge loan provides the necessary funds to make the purchase, allowing you to avoid missing out on the house of your choice. This flexibility is particularly useful when closing and sale dates do not align.
Offers short-term cash flow solutions for various purposes to give you more time to sell your home.
Take a deep breath, you don’t need to rush if you buy a home before selling your previous house. This flexibility can reduce the pressure of selling your home quickly and potentially increases your chances of getting a better deal.
Lets you use the equity in your current home for a down payment on your new home.
This eliminates the need to wait for your current home to sell before making the down payment, providing you with more flexibility and enabling a smoother transition into your new property.
Allows you to do renovations or upgrades to your new home while living in your old house.
This saves you from the inconvenience of temporarily relocating or rushing the renovations before moving in. You can take the time needed to complete the renovations to your satisfaction, ensuring that your new home meets your desired specifications before making it your primary residence. In short, it alleviates some of the stress associated with the renovation process.
What are the disadvantages of using a bridge loan:
Bridge loans are usually more expensive than a traditional mortgage.
Due to their short-term nature and the quick access to funds they provide, lenders often charge higher interest rates to compensate for the added convenience and risk. This means that the cost of borrowing through a bridge loan may be higher than other long-term financing options. It’s crucial to carefully evaluate the interest rates and fees associated with a bridge loan to ensure that the overall cost aligns with your financial circumstances and long-term goals.
It’s a high risk because your home may not sell right away.
There is a risk of being burdened with multiple loans if your current home does not sell within the expected timeframe. You may find yourself responsible for the original mortgage, the bridge loan, and the mortgage on the new home at the same time. This potential situation highlights the significance of thorough assessment during the application process for bridge loans. Lenders carefully evaluate the borrower’s financial circumstances and the likelihood of selling their current home to minimize the risk of being saddled with multiple loan obligations. It’s crucial to consider this potential scenario and ensure that you have a solid plan in place to sell your current home within the designated timeframe before agreeing to take the loan.
It’s harder to get approved.
Securing approval for a bridge loan requires a strong application, which entails having a good credit rating and a positive credit history so be sure that your credit history is clean, and that you put your best foot forward when submitting your application.
Is a bridge loan a good idea for you?
If you are wondering if a bridge loan is the mortgage solution you’ve been hunting for a professional mortgage broker, like myself, Darren Robinson, can help. I can assess your circumstances and help you find a lender that offers low-interest rates for your bridge financing and can recommend any alternatives that might be available for you to consider as well. Book an appointment to meet with me or give me a call at (705) 315-0516 and let’s talk about your dream home, and which solution is the best fit for you specifically.