Bridge Financing

In the context of residential home purchase and sales, bridge financing can be a useful tool for homeowners who need to buy a new home before selling their current one. The key to qualifying for a bridge loan in this scenario is having a "firm sale" of the existing home. This means that a purchase and sale agreement has been signed by both the seller and the buyer, and all conditions have been removed. This provides assurance to the lender that the home will indeed be sold and that the proceeds from the sale will be available to repay the bridge loan.

The close dates of the two properties need to be within 90 days of each other. This is because bridge loans are short-term loans designed to "bridge" the gap between the purchase of a new home and the sale of the existing one. The borrower typically has to carry both mortgages during this period, which can increase their monthly expenses.

There are often fees to set up bridge loans. These can be charged by the lender and by lawyers involved in the process. These fees typically do not exceed $1,500, but they can vary depending on the specific terms of the loan and the parties involved.

The interest cost on a bridge loan is typically higher than on a traditional mortgage, as it is a short-term loan with a higher risk for the lender. The interest rate is usually set at somewhere between Prime +2% to Prime +4%. The Prime rate is the interest rate that commercial banks charge their most creditworthy customers.

The maximum amount of a bridge loan is typically the lesser of the down payment required for the new home or the net equity in the property being sold. The net equity is calculated by subtracting the existing mortgage balance from the sale price of the property and then deducting an additional 7% of the sale price to account for closing costs.

Here's a simple example: If your existing home is being sold for $500,000 and you have a mortgage balance of $300,000, your net equity would be $165,000. If the down payment required for your new home is $150,000, then the maximum bridge loan amount would be $150,000, as this is the lesser of the two figures.