If you are in dire need of a huge amount of money immediately, then a bridge gap loan might be the solution for you.
A bridge gap loan, gap financing, bridge loan, bridge mortgages, interim financing, caveat loans, or swing loan is a short-term financing option offered by most major banks (CIBC, RBC, TD, Scotiabank, and BMO) and private lenders. The loan duration is typically six months to two years long, but they can be from 90 days to a year too. Banks charge an interest rate of around 2% to 3%, while private lenders charge interest rates of 7% to 12% with 4% to 6% fees. This is meant to be a temporary solution until the borrower’s financial situation improves and the borrower can soon qualify for a long-term loan from traditional A lenders that offer lower interest rates.
As explained in Investopedia, “Bridge loans can help homeowners purchase a new home while they wait for their current home to sell. Borrowers use the equity in their current home for the down payment on the purchase of a new home. This happens while they wait for their current home to sell. This gives the homeowner some extra time and, therefore, some peace of mind while they wait”. If you are looking to apply for a mortgage gap loan, read on.
How Does a Bridge Gap Loan Work?
If you have good credit standing and can show you are able to pay a bridge loan, it would be better to loan from banks or A lenders. They only require a copy of the Sale Agreement for your current home and the Purchase Agreement for your new home.
On the other hand, if you want an easier application process or if you have a low credit score (perhaps below 550), you may opt to apply for a loan from private lenders. Private lenders focus on the property they are investing in and not the borrower. That is why a borrower with low credit scores can easily borrow as long as they are able to pay the high interest rate. “Lenders have more leeway to accept a higher debt-to-income ratio if the new home mortgage is a conforming loan. They can run the mortgage loan through an automated underwriting program. Most lenders will restrict the homebuyer to a 50% debt-to-income ratio if the new home mortgage is a jumbo loan, however”, according to Elizabeth Weintraub from The Balance.
Bridge gap loans are intended to pay off your first mortgage, while others are additional debt on the overall amounts owed. Aside from the wide range of interest rates and fees, gap loans also have a big difference when it comes to payment structure. Some lenders may require monthly payments, whereas others prefer an upfront and end-term or lump sum payment.
Who typically applies for a mortgage bridge loan?
- Homebuyers who can’t afford to pay a down payment without first selling their current house
- Homebuyers who need to secure a new home fast
- Homebuyers whose closing date is scheduled after the closing date for the sale of their home
- Homebuyers who want to secure a new house before listing their current residence
Who Qualifies for a Bridge Loan?
The qualification for a bridge loan depends on where you take out your loan. Banks and traditional lenders require that you have a firm selling date. Rocket Mortgage explains that bridge loan applications are similar when applying for the standard mortgage. Loan officers still look at your credit score, credit history and debt-to-income ratio (DTI).
Private lenders, on the other hand, do not require this and you only would need a copy of the Sale Agreement from your current home and the Purchase Agreement for your new home.
How Much Can You Borrow on a Bridge Loan?
According to Rate Hub, majority of the lenders lend up to $200,000 for as long as 120 days. For a larger loan amount or longer time period, the lender usually evaluates depending on your case. Expect, of course, a higher fee for this. Private lenders often offer competitive terms to borrowers in order to capture market shares from big banks and credit unions.
Is a Bridge Loan a Bad Idea?
Getting a bridge loan is a decision made by a homebuyer who needs fast financing for a short term. It seems to be a bad idea because of the high interest and fees, but in emergency situations, this is a more welcome solution than forfeiting your dream home.
A bridge loan may not be a good idea if:
- You can qualify for a home equity loan which has a lower interest rate.
- You can sufficiently pay your down payment on your new home.
- You’re not sure when you will sell your current home.
- You’re not confident in being able to pay two mortgages simultaneously and have a bridge loan to top it off.
- You’re in a buyer’s market where contingent offers are acceptable and expected.
- You are able to sell your current home on time and use the sales proceeds to buy your new home.
What Credit Score is Needed for a Bridge Loan?
Each lender is different and there is no hard rule on what the borrower’s credit score needs to be to get approved for a bridge loan. Usually, those with good credit scores get approved. Similarly, those with low debt-to-income ratios are more likely to get approved.
If you find yourself needing fast financing or advice on where and how to do it, you can contact Mortgage Broker Store who works with a network of private lenders across the GTA and are more than happy to help and guide you in getting a mortgage gap loan.
