Looking at Bridge Loans
Bridge loans… What, when, how, why? Let’s get you informed and empowered around this topic.
A bridge loan is typically needed when an applicant’s home purchase closing date is before the applicant’s sold property’s closing date (if the applicant needs the proceeds from the sale of the sold property for the down payment and closing costs of the purchased property). In this case, the mortgage lender for the purchased property may lend the applicant the funds required for the purchase in lieu of the equity in the sold property, the sold property closing, and/or other terms and conditions.
Bridge loans are subject to terms and conditions, and although the terms, conditions and rules vary between lenders, here is an inconclusive list to eligibility criteria to remember:
- A bridge loan is only applicable if a borrower’s purchased property closes before their sold property.
- Not all lenders offer bridge loans. Although most prime lenders do offer bridge loans, it should not be assumed. Most alternate lenders do not offer bridge loans.
- Mortgage lenders consider bridge loans to be higher risk since bridge loans are often not registered against either property and the bridge loan approval are based on the goodwill that both the applicant’s sold and purchased properties will close.
- Bridge loans are not automatically granted; they must be underwritten and approved by the mortgage lender.
A borrower is only eligible to apply for a bridge loan if:
- The purchased property has been purchased firm [all conditions on the Purchase Agreement fulfilled] and;
- The sold property has been sold firm [all conditions on the Sale Agreement fulfilled] before [typically by the latest 15 banking days] the purchased property’s closing date.
Note: A bridge loan will not be granted based on a property merely being listed as “for sale”.
- Bridge loans are not stand-alone loans. Most prime lenders will only consider a bridge loan application if the borrower is also requesting a mortgage/loan from that same lender. [Exceptions may apply with private lenders]
- The borrower is responsible for both the purchased and sold properties’ mortgage and other payments during the entire bridge period. [The bridge period is the time between the purchased property’s closing date and the sold property’s closing date, inclusive]
- The deposit paid by the borrower for the purchased property will be utilized by the lender to reduce its bridge loan amount.
- Proceeds from the sold property will only be available and disbursed to the borrower on the closing date of the sold property, not the closing date of the purchased property. Thus, any debts that need to be paid off, equity withdrawals, etc. only become available to the borrower once the sold property has closed; not before.
- It is important to note that lenders may have a maximum bridge loan amount and a maximum bridge period. If the borrower’s required bridge loan exceeds these limitations the lender may not grant the borrower a bridge loan.
- Most lenders only cover closing costs of 1.5% times the purchase price of the purchased property. For example, a $750,000 purchase price: 1.5% x $750,000 = $11,250, even though the purchased property’s actual closing costs are most likely more than this amount.
- It is the borrower’s sole responsibility to cover completely, from the borrower’s own resources, any and all costs for both the purchase and sold properties that may not be covered by the lender’s bridge loan.
- A lender’s bridge loan amount will not exceed the borrower’s equity in the sold property.
- If a borrower has a Home Equity Line of Credit [HELOC] against their purchased and/or sold property, lenders may allow borrowers to fully draw their HELOC(s) to minimize their bridge loan amount.
Here are the typical costs that borrowers can expect for a bridge loan:
- Lender Application Fee: $300 to $600
- Bridge Loan Interest Rate: Prime(P)+2% to P+4%
- Bridge Loan Registration & Discharge Fees: Not all lenders register bridge loans, but the fees can range from $300 to $1,000
If you are selling your home and re-purchasing a home it is important to make obtaining a bridge loan part of your home purchasing process. Knowing the limitations of your bridge loan will protect you and it will allow you to negotiate a suitable closing date for both properties. Reach out to us, we can help you get clarity on this.