Today’s real estate market is flooded with first time home buyers, but it’s also flooded with existing home owners looking to upgrade… home owners who may need a bridge loan in order to close a new purchase. A bridge loan is only available to existing home owners who are closing the purchase of a new home, before the sale of their existing home closes. Not all banks will offer a bridge loan, but many do.
How a Bridge Loan works:
A bridge loan allows a home owner to successfully close the purchase of a new home prior to the closing of the sale on their existing home WHEN the down payment funds for the purchase are coming from the proceeds of the sale. Sound a little confusing? Let me explain in even more simple terms with an example.
Let’s assume you currently own a town home, and have listed it on the market. You accept an offer and have agreed with the buyers to close in 90 days. From the sale of this existing town home, you are using the proceeds to put as a down payment on a new home (let’s say you are upgrading to a detached home). You have made an offer on a new home and it is accepted by the sellers. You and the seller of this new home agree to close within 60 days. This 60 day closing on the new home is 30 days before the closing of your existing home, but the down payment is coming from the sale… what do you do?
Well, as long as there is a ‘firm’ offer on both the sale of your existing home and the purchase of your new home, the bank will do a ‘bridge loan’ where they will bridge the purchase (collateralize) with the existing home which is expected to sell at a date in the near future. This type of scenario requires the same underwriting guidelines as any deal, and the funds coming from the sale must be sufficient to meet the down payment requirements of the new purchase (unless you have the funds to make up the difference). To further illustrate with numbers, please read below:
- Your existing home is expected to sell in 90 days as agreed firmly in the Agreement of Purchase and Sale
- From this sale, you are expecting to walk away with $100,000 which will be needed for the down payment on the new home
- Your new purchase is expected to close in 60 days (before the sale) as agreed firmly in the Agreement of Purchase and Sale
- The minimum down payment required on the new property is $85,000, which unfortunately is tied up in the equity of your existing home
How can you close the purchase if you don’t yet have the funds available for the down payment? Well this is exactly the type of scenario where a bridge loan comes in handy. The bank will do what is referred to as bridge financing or a bridge loan. They will close the purchase property (technically with no down payment at this point), conditional on receiving the required down payment once the sale of your existing home closes. A bridge loan is usually offered for closings within 30 days apart from one another. Anything outside of this 30 day window is on an exception basis only, so it’s important to strategize your closings to ensure a bridge loan becomes a valid option. For further information of bridge loans, call us!