Sometimes in life, things don’t always go as planned. This could not be truer than in the world of Real Estate. For Instance, lets say that you have just sold your home and purchased a new home. The thought was to use the proceeds of the sale of your house as the down payment the the new purchase. However, your new purchase closes on June 30th and the sale of your home and the sale of the existing house doesn’t close until July 15th – Uh-oh! This is where bridge financing can be used to ‘bridge the gap’.
Bridge Financing is a short-term down payment that assists purchases to ‘bridge’ the gap between an old and a new mortgage. It helps to get you out of a sticky situation like the one above and has a few minimal fees associated with it.
The cost of a bridge loan is comprised of two parts. The first is the interest rate that you will be charged on the amount of funds that you are borrowing. This will be based on the Prime Rate and will vary from lender to lender. As a rule, you can expect to pay Prime plus 2.5%. The second cost to consider is an administrative fee. Again, this will vary depending on the lender and can range from $200-$695.
The amount that you are able to borrow is easily calculated. The calculation looks like this:
Sale Price
(less) estimated closing cost of 7%
(less) new mortgage of the purchase property
= Bridge Financing
*Note: The closing costs include the expense of realtor commissions, property transfer tax, title insurance, legal fees and appraisal costs if applicable.
So that’s the cost side of things, now the next question is: How long? The length of time that you can have Bridge Financing is going to vary again from lender to lender as well as what province you are in. For most, it is in the range of 30-90 days but there are some lenders that will go up 120 days in certain cases.
Before applying for Bridge Financing, you must also have certain documents and be ready to present them. The documents include the following:
- A firm contract of purchase and sale with a copy of the signed and dated subject removal on the property that you are selling and the property that you are purchasing.
- An MLS listing of the property being sold & purchased.
- A copy of your current mortgage statement .
- All other lender requested docs to satisfy the new mortgage and upcoming purchase.
Once you have those documents, you can work with a qualified mortgage broker to apply for bridge Financing, it is an important tool to understand and a great one to have in your back pocket for when life throws you one of those ‘curve balls’. You can have peace of mind knowing that if/when that situation arises, you are not without a strong option that can provide you with interim financing for minimal cost.
As always, if you have any questions about Bridge Financing, or any quotations about your mortgagee (be it new or old) contact me anytime.
Cory Lewis, Jencor Mortgage
Blog posted by Geoff Lee GLM Mortgage Group Vancouver, BC