Navigating Bridge Financing: A Guide for Homebuyers

Are you in the process of buying a new home but finding yourself in need of some extra financial support to bridge the gap between selling your current home and purchasing a new one? Bridge financing could be the solution you're looking for. In this guide, we'll walk you through everything you need to know about navigating bridge financing as a homebuyer.

What is Bridge Financing?

If you're in the process of purchasing a home, you might have come across the term "bridge loans" and questioned their purpose and necessity. For first-time homebuyers, bridge loans typically aren't a financial tool to contemplate. However, if you're already a homeowner aiming to sell your current property and purchase another, the possibility of requiring a bridge loan alongside a mortgage becomes relevant, contingent upon your specific circumstances.

Bridge financing is a short-term loan that helps homebuyers cover the down payment and closing costs on a new home before selling their current one. It essentially bridges the financial gap between the sale of your old home and the purchase of a new one.

Also known as a bridge loan, this temporary loan allows you to purchase and move into your dream home before your current home's closing date. 

How Does Bridge Financing Work?

When you secure bridge financing, you can use the equity in your current home as collateral to access funds for the down payment on your new home. Once your current home sells, you can use the proceeds to pay off the bridge loan.

Bridge loans are short-term loans, usually ranging from a few days to up to a 90 days, depending on the lender. They typically have higher interest rates compared to traditional loans due to their short-term nature and higher risk for the lender.

Pros and Cons of Bridge Financing

Pros:

• Provides flexibility in buying a new home before selling the current one
• Allows you to make a stronger offer on a new home without a sale contingency
• You are free to accept the best offer on your home, regardless of closing date
• You can take your time moving into your new home—and even complete some renovations—instead of moving everything in one day

Cons:

• Higher interest rates compared to traditional mortgages
• You must have a firm closing date on the property you’re selling to get a bridge loan from your mortgage provider
• Short repayment terms - up to 3 months (with some exceptions)
• Can be risky if your current home doesn't sell quickly

How to Qualify for Bridge Financing

If you need a bridge loan, it won't affect your ability to get a mortgage. You don't have to prove your income to qualify for a bridge loan. You just need to have a firm offer from a buyer to purchase the property you're selling. A bridge loan is like an extra loan on top of your regular mortgage - for which you have to prove your income and qualify in a tranditional manner.

With the bridge loan, your lender gives you the money you'll eventually get from selling your property to help with the whole process.

Costs associated with Bridge Financing

Bridge loan interest rates are typically higher compared to conventional rates due to their unsecured nature, short-term duration, and the fact that the lender essentially finances the entire house purchase during the bridge loan period. Anticipate interest rates ranging from Prime Rate + 2% to Prime + 4%, translating to approximately 9% to 11% currently. Additionally, some lenders may impose an application fee of around $250.

Despite the higher rate, the bridge loan costs could be minimal if you need the bridge loan only for a couple of weeks!

Final Thoughts

Bridge financing can be a valuable tool for homebuyers who need temporary financial assistance during the transition between homes. It maximize your flexibility when selling and buying your next home. 

Instead of worrying about lining up your closing dates on the same day, consider bridge financing as an easy and cost-effective way to increase your flexibility when your buy and sell dates don’t overlap.

However, NOT not all lenders offer bridge financing. an experienced, independent mortgage broker will have access to several who do.

Remember to consult with a financial advisor or mortgage specialist to discuss your specific situation and determine the best course of action for your home buying journey.

Feel free to email me at [email protected] to discuss your mortgage options when selling and buying.