What Exactly is Bridge Financing?

January 15, 2018 10:56 pm Published by

A professional bridge financing agent taking a break to read the newspaper

Appropriately named, bridge financing bridges the gap between the time funds are needed but are unable to be provided. This type of financing can be used when someone is selling their current residence to buy a new home, but their sale date happens after their purchase date. For most people, they need the proceeds from their sale (currently their equity) to either buy the entire new property or use the proceeds to form their down payment.

Other common uses for bridge financing are renovations, cash flow, starting a business, paying CRA and divorces.

So bridge financing is a loan that is associated with your current residence but is used to provide the necessary money to purchase your new home. Once you sell your home, your Lawyer or Notary will pay off the bridge loan from your sale proceeds.

Why would someone buy before they sell?

In booming real estate markets such as Vancouver, this happens often. This is because if houses are selling very quickly, you may not have the luxury of lining up your purchase and sale dates how you desire.

Because bridge financing enables you to buy before you sell, you do not have to put a contingency on your offer. With a contingency on your offer, the seller will be less likely to accept, especially if they have multiple offers to choose from.

  • A contingency on offer would be a condition that stated the purchase is subject to the buyer’s sale completing on ____ date. This would force the seller to stay in their house longer than they originally wanted, therefore, making it an unappealing offer.

Where can I obtain bridge financing?

Bridge financing is typical but is not offered by all financial institutions. Most often you will seek out bridge financing from one of the big banks, as it is the most cost-effective method. The problem with this is they will usually want you to be obtaining a mortgage from them as well, as they don’t like to deal with shorter-term loans. So what they do is use the bridge loan to secure the long-term mortgage. It is important to note that to qualify for this, you will also have to meet their stricter lending criteria.

If you are in a time sensitive situation, you may need to receive this financing from an alternative lender, as they can work under shorter and quicker time frames. They are also more lenient of acceptance of bad credit and low or no income. Something to keep in mind is a lot of alternative lenders do not deal directly with the public and require you to be working with a mortgage broker. And just like the banks, they are more hesitant to proceed with short-term loans like bridge financing.

Are there alternatives to bridge financing and are they better?

The main alternative to consider would be the Home Equity Line Of Credit (HELOC). Although the rates and fees tend to be cheaper for a HELOC, the big thing to remember is that most lenders won’t want to provide a HELOC if your home is listed for sale.

A HELOC would be able to be utilized if you were going to buy a home before you listed your current residence, but there are more factors to consider here too. Some factors include your qualifying ratios, payments you will have to make and what if your home doesn’t sell as soon as you thought.

For a full article on qualifying ratios and the stress test which will impact these ratios click here.

Whatever financial decision you make, it’s essential to get in contact with a professional to discuss the pros and cons of each option. No one has the same situation, so it’s best to search out the solution that best suits your needs.

A cartoon visual representation of a bridge loan with cash and coins

What are the bridge loan qualifications?

Please keep in mind all lenders criteria’s may vary slightly, but the below factors should be considered.

Equity:

No lender will provide bridge financing if there is not a suitable amount of equity in your home. For the loan to values, you will have to contact the financial institution directly as they will all vary with their lending parameters.

You will also be required to pay for an appraisal which will cost you around $300 – $400 to ensure there is enough equity.

Credit score:

Your credit score helps lenders determine if you are a risky borrower and if they lend you the money, what the chances are of you paying this back. Credit scores, also called beacon scores, range from 300 – 900 and the higher the score, the better.

A breakdown of credit scores:

750-900 – Excellent credit

650-749 – Good credit

575-649 – Fair credit

500-574 – Could use improvement

300-499 – Needs work

The lower your credit score is, the less likely you are to receive financing. If you receive financing with a lower credit score, the financer will most likely require a higher return, i.e., interest rate. Just like if you were to invest in a high-risk investment, you would want to receive a higher return.

So bad credit, no credit or low credit ultimately limits the options available to you. This isn’t saying there are no options available, but you may have to search a little harder and pay a little (or a lot) more.

Income:

Depending on the type of lender, they will all handle income differently. Some will require you to qualify for their GDS & TDS ratios (Gross debt servicing ratio/ Total debt servicing ratio) and others will not. If you do not have the verifiable income to support this loan, chances are you will not be able to receive bridge financing from a bank.

For a full article on qualifying ratios and the stress test which will impact these ratios click here.

Does Deposit Financing offer this service and what are the pros and cons of bridge loans?

Yes, we do.

If you have a firm sale agreement, there can be many advantages by using Deposit Financing for a bridge loan.

Advantages:

  • Acceptance of bad credit
  • No income verification
  • No mortgage registration (Saves you legal and mortgage registration fees – approx. $1,000-$1,500)
  • No  monthly payments as the interest will accrue
  • No Appraisal (roughly $300-$400)

If a service like this can be of value to you, please contact us at admin@depositfinancing.ca.

If you do not have a firm sale, please contact us at Deposit Financing Canada with your situation, and we will provide you with alternative criteria and solution.

Deposit Loans

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