I often hear the question, can I use bridge financing if my house doesn’t sell? There is a common misunderstanding about what is, and when “bridge financing” is used, so I thought I would help in clearing this up.
To clarify, bridge financing is used when you have purchased a home, for example closing August 1st, and you have your current home unconditionally sold, closing Sept 1st, one month later than your purchase date. It is this short period of time between the purchase of a home and the sale of a home that bridge financing fills the gap.
The key is that the house you own is UNCONDITIONALLY SOLD, meaning you have an accepted agreement of purchase and ALL conditions that are part of that agreement have been waived by the purchaser (i.e. building inspection and financing clause).
In this scenario it is a simple bridge. The same lender that is giving you your mortgage on the new home, will lend you your expected down payment from your sale (that you won’t get till your house sale closes) on a short term bridge loan at a minimal cost. A setup fee of approximately $250 and interest of up to Prime +4% is commonly charged but can differ from one lender to the next. Depending on the size of the bridge loan required, and the lender you use (let’s assume over $100,000) the lender also may require your lawyer to register the loan as a mortgage against your residence.
If your existing home is NOT sold, then bridge financing is NOT available.
In this scenario you have to simply REFINANCE your home if there is sufficient equity in your home to borrow the down payment. Remember that you can ONLY REFINANCE up to 80% of a property’s value, therefore you’re not always able to refinance a home for down payment when it does not sell.
You must also qualify with income and credit when refinancing which can be an issue at times when you are carrying two properties.
Refinancing requires a mortgage to be arranged on your existing home. It often involves paying for an appraisal of your home and a lawyer to register the mortgage.
It is very important to look at this worse case scenario when purchasing a home without a condition of selling your existing home. And I’m afraid this is usually the case when purchasing a builder built home a year down the road. If you don’t have the ability to borrow the down payment from your home or access it from family if your home doesn’t sell, or qualify to carry both properties, then you really should reconsider the whole purchase.
The ideal scenario is purchasing a home with a condition of selling your existing home. This way eliminating any concerns.
For all of you out there that have purchased already, closing down the road, and have a home to sell, make sure you look into the worse case scenario(of your home not selling before your purchase date) with your lender. It is best to know your options earlier than later. Plan ahead and get your house listed (ideally with a knowledgeable REALTOR) with plenty of time to sell, and make sure it’s priced right for the market. Today is currently a buyer’s market.
I am currently seeing more scenarios of houses NOT being sold, and unless planned for, it’s not a position you really want to be in.