For most people buying a new home is one of the largest financial decisions they will ever make. Planning to move takes a lot of effort, and most people prefer to move into their new home shortly after the purchase. It can take a lot of time to renovate and prepare a new house before moving in. Unfortunately, real estate transactions often move slowly and coming up with a down-payment before your current property is sold can be difficult. Bridge financing is a kind of short-term loan that helps home-buyers come up with the money needed for a down-payment.
What is Bridge Financing
A bridge loan is a short-term mortgage that is placed on a buyer’s current home to allow them to purchase a new home. People who rely on the equity in their home to make a down-payment on a new home will require this kind of loan. Since this is such a common type of loan, most lenders including the major Canadian banks and alternative lenders offer bridge financing. Some smaller private lenders may not be able to provide a bridge loan so you may want to contact an Ontario mortgage broker to understand your options.
Lenders that Offer Bridge Financing
While most lenders offer bridge financing, the different types of lenders are different in their rates, fees, and approval criteria. The major Canadian banks will offer the lowest rates and fees but have strict approval criteria. As with most bank loans, you will need a high, consistent income and a high credit score to get approved. Large alternative lenders such as credit unions and trust companies will also take into account the applicant’s credit score and income but have more lenient criteria. Private lenders do not focus an applicant’s credit score or income, and instead, they focus on the equity in the property. Most private lenders in Ontario can approve a loan as long as the total of all debts against the property does not exceed 75 to 80% of its value. Private lenders can approve loans to the highest-risk clients but they also charge the highest interest and fees. As with most loans, the higher the risk the more the lender will charge in terms of interest and fees.
When is the best time to get a bridge loan?
Bridge loans and short term mortgages are a good financing option in many different situations.
- Financing Falls Through: If you had set up financing which was rejected at the last moment it can ruin your purchasing plans. You can quickly get a loan from an alternative or private lender to continue with the purchase.
- Change in Timelines: If the home buyers/sellers you are dealing with have delays with their financing it can also disrupt your plans. A short-term loan can help pay for your expenses while the other parties arrange financing.
- Unexpected Debts: With some credit card, tax, or construction debts the people owed money can place a lien on your property. Money from a mortgage can be used to pay off any liens.
- Consolidating Debts: Most personal loans and credit cards carry a very high rate of interest. It might be possible to lower your interest payments by using a mortgage to pay off your high-interest debts.
- Stop Power of Sale or Foreclosure: If you’ve missed payments on your mortgage, your lender may take your property in the power of sale or foreclosure process. You can get a mortgage to pay your lenders and stop these legal processes.
How to Apply for a Bridge Loan
The best place to start looking for a bridge loan is your local bank. Most major banks will need to see a copy of the Sales Agreement for your current home and the Purchase Agreement for the home you’d like to buy. The major banks will need to see a firm selling date in order to approve a bridge loan. If you don’t have a firm date, you can still get approved with an alternative or private mortgage lender. The non-bank lending landscape can be overwhelming for some people since there are so many different options with widely different costs and lending criteria. To simplify the process of getting a loan from a private or alternative lender, you can contact our team to discover your options.