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How Does a Mortgage Bridge Loan Work?

You’re buying a new home but you haven't sold your existing home yet. What options do you have and what should you do?

For buyers who currently own a home but are looking to purchase a new home, they usually need to access funds for their down payment. If you have cash on hand already, then this blog post is probably not for you. This post is for people who need their existing equity in their existing home to use as a down payment for their new place.

One of the most frequently asked questions is….should I sell first? Or should I buy first? And of course, the answer is that it depends on the market. In an environment where real estate inventory is very low, people usually buy first and then sell because it’s much more difficult to secure a purchase versus selling an existing home. The last thing you want to do is sell your home and then scramble to buy a new home within a limited timeline.

The best case scenario in this type of situation is you buy a place and set the completion date say, 4 months away. This gives you time to list and sell your existing place and to line up the 2 completion dates - one for the purchase and the other for the sale. What you want to try to do is to set the completion date of the sale BEFORE the completion date of the purchase. That way, you'll receive the funds first and then you can use it towards your purchase. Now, note that I said the completion date…that’s when the transaction opens. You can still negotiate the possession date so that there’s some overlap to help you with the move and transition from your existing place to your new home.

But, that's the best case scenario…we know that sometimes things just don’t go our way. What if you received a very good offer but the completion date of the sale of your existing home comes AFTER the completion date of the purchase? That’s when a bridge loan comes in to assist with the purchase. A bridge loan gives you a short term temporary loan in situations where your down payment is coming from the sale of your existing home but it comes AFTER your purchase. In this situation, we can apply and qualify for a bridge loan as long as the sale and the purchase is within 90 days apart. We simply need to calculate how much equity is available of your existing home and this is very important…we need a FIRM sale agreement. This is very important because banks are using the FIRM sale as their security to lend you additional funds for the purchase.

When the bank has the 2 completion dates confirmed, they can calculate the amount and interest and request for the bridge loan to be paid back at the time of the sale of the existing home. That’s it! No extra payment is required, no special income qualifications are required -- we just need to get that firm sale agreement, a current mortgage statement of the existing home, and then a bridge loan can be set up.

And that is how a bridge loan works! If you have more questions regarding bridge loans or ways you can get a mortgage approval, please reach out to us!

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