In the simplest terms, bridge financing is a short-term lending option that helps homebuyers bridge the gap between their old and new homes. It is often a short-term solution for the buyer in order for them to arrange the mortgage for their new purchase.
Recently, conventional banks have released guidelines, which make it increasingly hard to qualify for a bridge loan.
The advantages of bridge financing are that you can get the funds you need before your home sells. This can give you the ability to purchase a new home and have some liquid money before your sale closes. The bridge may also give you some money to do some touch-ups or renovations to your home before listing for sale. See our blog on home renovations and increasing your property’s sale price before listing by visiting our blog: https://www.tembofinancial.com/2020/03/03/5-ways-to-increase-your-home-value-before-listing-for-sale/
How does it work?
At Tembo Financial bridge loans are offered to clients without a lengthy list of criteria. We are able to assist clients with the funds that they need to bridge the gap between their purchase and their sale. Bridge financing works by putting a mortgage on your current property and sometimes your new property also, and only pay us back once your property has sold and closed! With flexible payment structures available, you may not have to make any monthly payments!
Need more of an explanation? See the example below:
You are currently a homeowner at 12 Oneway Avenue and have just accepted an unconditional offer from a buyer for your current property, which has a closing date of September 18th. The purchase price was $700,000.00, and after paying off your mortgage, closing costs, and other costs such as moving or renovations, your net proceeds will be approximately $300,000.00.
You’ve already placed an offer on a new property at 32 Ridgeway Crescent for $500,000.00, which is accepted, and your new property’s closing date is August 29th, 20 days before the closing date of your existing home.
On your purchase, you’ve made a $25,000.00 (5%) deposit, and have decided to use $300,000.00 of your net proceeds from your sale towards your purchase. You’ll need that $300,000.00 on your closing date (August 29th), however, you won’t receive the proceeds from your sale until September 18th. What do you do?
This is where bridge financing would be used, as you would take out a short term $300,000.00 loan for the 20 interim days between your purchase closing (August 29th) and your sale closing (September 20th). Although this situation is quite common, as exact closing dates aren’t always possible, such financing can be difficult to obtain from a bank, especially if the gap is greater than 30 days.