If you’ve been in the process of selling one house and then buying another, then you know that lining up the two closing processes can be tricky. You can end up having to take on a second mortgage while you’re still paying the first one, and unless you have significant means, you may not be able to get that approval while the first mortgage is still out there.
This is an example of a way in which the type of bridge financing Canada allows can come in handy. If your existing Lender is unable to assist, Private mortgage lenders are just one possible source for this immediate cash flow that can help you swing things until you sell your house and get the funding from those proceeds. With that loan off the books, you can move ahead and get the mortgage for your new house.
Bridge loans that are part of moving from one purchase mortgage to another can be somewhat risky, and so they come with comparatively high interest rates. However, they are also highly customizable, and there are situations where they are useful outside transitioning from one home to another in real estate transactions.
What Is Bridge Financing and When Should You Use It?
If you’re buying a new home with your current home on the market, then the sort of bridge financing Canada lenders offer might work well for you. The equity in your current home serves as collateral for the bridge loan, whether you use private mortgage lenders or traditional lending sources, and so that goes for the down payment for your new home while you wait for your existing home to sell and go to closing. The interest rate here will usually be higher than a home equity line of credit (HELOC), though, even though bridge loans for real estate purposes are generally only available through traditional lenders to borrowers with low debt-to-income ratios and excellent credit. Basically, you’re rolling two mortgages together until the first house sells. Depending on location, lenders will generally cap their offers at about 65% to 80 per cent of the combined property value in the two houses. That means that you either need considerable cash savings or home equity for this to work.
Businesses also use bridge loans when they have to cover bills over the short term while waiting for financing to come in on a more long-term basis. One example might include a business setting up equity financing that will close in 4-6 months. Between now and then, it could use a bridge loan to pay for inventory costs or even such day-to-day expenses as utilities, rent and payroll until the large closing check comes in.
Bridge loan application periods are generally shorter than traditional financing, whether you’re looking at this for real estate or business purposes. That convenience comes at a price, though, as the terms are comparatively short and the origination fees and interest rates are comparatively high. This might be the right vehicle for you, but you’ll want to weigh your options carefully.
How to Secure Short-Term Loans for Real Estate Investments
There is another scenario for the sort of bridge financing Canada lenders provide in the area of real estate in addition to people moving from one house to another. Real estate investors can benefit from bridge financing because the short terms (usually 12-24 months but sometimes as short as six months) are ideal, and the documentation and underwriting are less extensive than what you need with a traditional or even a refinance mortgage.
A commercial bridge loan can take on a number of different forms. It can serve as a refinance mortgage for office buildings, multi-family housing or retail property, and borrowers can also use it to fund purchases when they plan to renovate and flip the property within the term of the bridge loan.
In this sort of situation, a hard money bridge loan might be the right vehicle. This is basically short-term financing secured by a piece of real estate. It is a type of asset-based lending that real estate investors use. The basis of the collateral is the value of the property, and hard money lenders focus more on that number than a borrower’s credit history.
Whether you’re looking at investing in residential or commercial real estate, this sort of bridge financing can leverage funding from private mortgage lenders and allow a person with poor credit to begin a career as a real estate entrepreneur. The interest rates will be higher, as will the origination fees, but if you see room to make money on turning the property over, you can still bring a profit out of this situation.
Pros and Cons of Bridge Loans in a Changing Economy
One thing we’ve learned over the past few years is that it does not take much for the economy to go for a wild ride. A mutation in a virus on the other side of the world led to a global pandemic. A lack of regulation in the mortgage industry almost led to a global financial meltdown. The recent presidential election in the United States has led to a trade war that few could have predicted. So, is a bridge loan really the right choice? Let’s break down the pros and cons.
Benefits of a Bridge Loan
- You have a safety net in place. Whether you’re a business looking for short-term funding ahead of a larger infusion of cash down the road, a homeowner looking to move from one place to another and close on your new house before your original house sells, or an individual looking to start a career as a real estate investor, a bridge loan can put the cash you need in your bank account for as long as 24 months.
- You have flexibility in payment terms. Depending on the lender, you may be able to defer your payments or make interest-only payments until you can sell your existing home.
- You can purchase real estate with less hassle than a traditional mortgage. If your credit is less than perfect and you’re an investor looking to turn a property around in less than two years, then a bridge loan can give you the financing you need with fewer documents to sign and a less rigorous application process.
Drawbacks of a Bridge Loan
- You face relatively high interest rates. The lender has to do a significant amount of work in a short amount of time for a loan that will have a term of two years at most. This is why the interest rates can be so high – approximately 8.5 to 10.5 percent of the total loan amount.
- You face high origination costs. Again, because of the relatively high amount of work that the lender has to do for this form of financing in comparison to a traditional purchase mortgage, the closing costs and fees can be higher than what you would face with traditional forms of financing.
- You could face rates that climb over the course of the loan. You may deal with a lender that wants to use a variable prime rate. Over time, your interest rate would climb. It’s true that you’re dealing with a comparatively short term, but that could still drive up your costs significantly.
- You could find that the term of the loan is too short. Let’s say you sign a six-month bridge loan, confident that your original house will sell. However, the private mortgage lenders you work with may not be flexible if you haven’t sold the house by the end of that time – or even if you’ve found a buyer but are just at the beginning of the process of moving toward closing.
Where are you in the refinance mortgage or the purchase mortgage process? Are you at a point where the bridge financing may benefit you? We have worked with many clients in situations that may be similar to yours and can determine quickly if your request is a fit for our network. Contact us today or submit a no-credit check prequalification.