What is a Bridge Loan?

Have you ever asked the question ‘what is a bridge loan?’ Unless you’ve been stuck with two homes and you only want one, probably not.

Earlier this summer I met two couples who’d bought new places but hadn’t sold their existing homes yet. Needless to say they were a bit anxious to get their homes sold. This got me thinking about the stress they must be feeling, and I wondered if these couples knew about a financing option called a bridge loan.

In a typical market a buyer who already owns a home will often put in an offer conditional on the sale of their existing property, if they wish to sell of course. Many buyers also want conditions for financing, inspection and insurance, whether they own property or not.

From a seller’s standpoint conditional offers are less desirable than firm offers, because of the risk of the buyer pulling out of the deal. The riskiest of the offers I mentioned is an offer conditional on the buyer selling their property. These offers are often rejected unless a significant premium on price is included, or if the seller is having a difficult time selling their property.

The Waterloo region market has been anything but typical over the last year and a half. The vast majority of sales have been firm with no conditions at all. A buyer with a condition for the sale of their existing property would be instantly rejected, as would the vast majority of buyers attempting to include the typical 3 conditions for financing, insurance and inspection.

The two couples I mentioned were experiencing this exact situation first hand, where market pressure forced them to buy without having sold their current homes. What would they do if the closing date of the new home was sooner than the closing date of the home they’re selling?

These couples have a few options available to help pay the bills for two mortgages plus the closing costs and down-payment on the new purchase. They can rely on savings and income, borrow against any lines of credit they have, or they can get a bridge loan from their lender.

This latter financing option covers the down-payment and closing costs on the new purchase. To calculate the cash you need for a bridge loan simply subtract the amount of the initial deposit and the mortgage amount from the purchase price and closing costs of the new home.

Lenders will allow up to 90 days between the two closing dates and the offer on the existing property must be firm. Interest rates and expense for this type of financing are high, but only for a short duration. A Bridge Loan is a very useful tool for purchasing in a hot market such as ours.

Here’s some more info about bridge financing: Globe and Mail and here’s the link to my financing posts

Knowing there are solutions to the problem of owning two homes at once should help buyers sleep a little better at night.

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