Bridge Financing or a bridge loan is a short term, temporary loan, to cover a borrower’s down payment when closing dates between two real estate transactions don’t match. The bridge financing will be paid upon the closing of the last real estate transaction.
Bridge Financing
In the event the date of the sale of a home doesn’t happen prior to the completion on a new purchase, a home buyer may have the option to secure bridge financing through their mortgage broker and the lender. The bridge financing is needed to temporarily supply the down payment for the new purchase when the proceeds of the sale are not yet available from sale of the current home. The lender providing the buyer with the new mortgage typically provides the bridge loan but if that isn’t an option your mortgage broker can source bridge financing through a second lender.
Note: It is important to know to secure bridge financing there must be a bona-fide sale of the current home. Access to bridge financing can’t happen if the home is for sale but not sold. In order for bridge financing to work both sides — sale and purchase must be solid and subject free in order for the BRIDGE to be a bridge.
Example
James is purchasing a home for $300,000 from Susan and Mark, of which $250,000 is financed through a first mortgage. The down payment of $50,000 will be from the proceeds of the sale of James’ current home. A closing date for James new home purchase is March 31, but the sale of his current home can’t complete until April 30. Susan and Mark can’t wait the extra month as they are buying another home and need proceeds for that purchase.
James’ mortgage broker arranges 30 day bridge financing of $50,000, for the down payment payable on March 30th, along with the funds for the $250,000 mortgage to complete the purchase transaction on time. When the sale of James’ home completes on April 30the, the proceeds of sale will be used to pay off the $50,000 bridge loan, plus any interest over the 30 day period of the loan.
The fee for bridge financing varies by lender but usually consists of a one time fee of $250 to $600 plus interest which is charged over the period of the loan. Rates range from prime plus 2% to 5%.
For more information listen to my recent interview on 98.7 CKPM Radio. https://soundcloud.com/604newhome/nhrs-seg-2-jan-25-2014-pauline