Would you like to buy a new home before selling your existing? Curious about what bridge financing is? Here are the steps and important items to note:
- A mortgage application for a pre-approval/purchase is prepared based on the available money for a down payment.
- If all, or part of, the cash is tied up in the equity of the existing home, you can apply for a refinance to use the equity in your existing home as a down payment for the new property.
- Until there is a firm and binding sale on the existing property, the bank has to take into consideration the fact that the existing property might not sell, so you have to qualify to carry both properties.
- Often we can use “economic rent” from the existing property to help the application qualify. The “economic rent” is provided by an appraiser.
- The financing can be approved based on just the new purchase once there is a firm and binding offer on the existing property.
- An actual “bridge loan”can be arranged if the existing property has sold and the closing dates do not coincide, ie new purchase closes April 30th, but money for the sale comes in May 15th. A bridge loan would be arranged for that short 2 week window.
- The mortgage for the refinance, and the mortgage for the new purchase may be arranged on an “open variable” rate or maybe a short term 1 year fixed rate, to allow for appropriate pay down once the other property has sold.
- In some cases, you may end up paying a higher rate of interest or set up fees due to the short term nature of the financing.
- If a refinance is to happen, it is best if it is applied for and approved before the existing property is listed for sale.
- In these situations, be prepared to incur the cost of 2 appraisals, one for the existing property, and possibly one for the new purchase. Depending on the property location and the level of downpayment, an appraisal may not be required for the purchase, but in all likelihood will be needed for the refinance. Each case is different.
- Also, with a refinance, there will be legal fees incurred. These are usually approximately $1,000. These fees will be in addition to the regular legal fees associated with a purchase.
- If there is a mortgage already in place on the existing home, find out how much the penalty is going to be to break it. This may influence your decision on how to structure the financing and which lenders you want to work with in your transition.
If you want to know if you qualify to purchase a home before you have sold your existing, I am happy to help. It starts with completing the on-line application, here.