Have you accepted an offer on a new home but need to sell your current property first before taking possession? A bridge financing Canada might be just what’s necessary.
Large banks such as BMO, TD, RBC and Scotiabank offer bridge loans for home purchases. Qualification for these loans resemble those for mortgages: creditworthiness and stability are important criteria to meet in order to qualify.
What is a bridge loan?
Bridge loans provide short-term financing solutions for home buyers who cannot wait until their current house sells before purchasing another property. They usually come with higher interest rates than mortgages, and are secured against their existing property as collateral.
Bridge financing allows homebuyers to avoid the risk of having to accept low offers for their current property due to not selling yet, which can be especially advantageous when the real estate market is active and there are multiple competing homes on offer.
Bridge financing can also be useful when looking to purchase in an area before it becomes too expensive, or needing to move due to job transfer. Bridge financing enables you to close on your new home before selling your old one, thus eliminating PMI which increases monthly mortgage payments and saves you time by closing simultaneously with both transactions.
How do I qualify for a bridge loan?
Bridge loans can be an ideal solution for homebuyers who must close on their new property before selling the old. Not only can this help avoid expensive fees associated with mortgage insurance and PMI policies, it can also remove contingent clauses from purchase offers to make them more appealing to sellers.
Bridge loans require similar qualifications as mortgages: lenders will look for high credit scores and debt-to-income ratios as well as copies of your existing mortgage statement.
Bridge loan interest rates tend to be higher than traditional mortgage rates because lenders take a risk by lending you money before your house sells, yet interest only accumulates for a short period of time – usually enough time for you to repay the loan with proceeds from selling your home. Furthermore, it may be possible for you to get one from the same lender that holds your current mortgage – making the process even simpler!
What are the benefits of a bridge loan?
Bridge loans provide buyers with the financial flexibility to act quickly when they find the ideal home, eliminating contingencies from their purchase agreement and helping to ensure competitive sellers don’t receive multiple offers from prospective buyers.
Bridge loans tend to carry higher interest rates than mortgages because lenders need enough interest income from lending the money. Furthermore, bridge loans frequently have associated fees that could add up over time and ultimately cost the borrower more in total than expected.
Bridge financing can be obtained from numerous lenders in Canada, such as major banks. They’re easier to qualify for than mortgages and therefore make perfect sense for people with poor credit or still working towards improving their finances – however it should be remembered that you will end up paying two mortgages simultaneously, making debt management more complex. Furthermore, you may have to register a lien against your property which could add even further expenses.
What are the drawbacks of a bridge loan?
Bridge loans can be costly. Their fees include high interest rates as well as front-end fees such as valuation payments and legal fees from lenders. Furthermore, borrowers often take out second mortgages on their new homes to provide down payments on bridge loans – but once their old house sells they must repay both loans simultaneously.
However, bridge loans are only suitable if you have significant equity in both homes, so lenders typically approve only up to 80% of the combined value. They’ll also review your credit history and debt-to-income ratio to ensure you can afford two mortgage payments simultaneously. Bridge financing can help you compete with other buyers in an overly-competitive market and remove contingencies that could delay selling your existing home; ultimately it is wise to carefully weigh risks and benefits before making this decision.