Here is a great Q&A session with Victor Hussein, a highly recommended Real Estate Lawyer:
QUESTION: I am selling my present home and purchasing another home. The closing date for the home I am buying is 15 days before the date on which I am selling my old home. In order to have the funds to buy my new home prior to selling my old home, my bank has suggested I get bridge financing. What is bridge financing and what are the pitfalls if any in getting bridge financing?
ANSWER: “Bridge Financing” or “bridge loan” is a type of financing arrangement whereby a lending institution will advance funds on a short term basis using the equity in your present home as security and/or other security such as your personal undertaking or guarantee.
With this type of financing, the lending institution will advance funds to make up any shortfall you may have in buying your new home. You will then simply have to repay that advance from the proceeds of the subsequent sale of your old home. The financing or loan may take many forms such as an unsecured personal loan, a credit line, or, a mortgage placed upon your old home.
The amount of the advance, and the form of advance, available to you will depend entirely upon your personal financial situation and on the length of time between the purchase of your new home and the sale of your old home. Factors the lending institution will consider include
your established credit worthiness, the equity you have built up in your existing home, your present income, and your financial assets.
So, what are the costs involved in arranging bridge financing? Bridge financing is in all other respects similar to any other loan you may require. Interest will be charged on the amount advanced until it is fully repaid. There may also be various administrative fees charged including fees to set up the advance and to payout the advance. As always, make proper inquiry of all the expenses you are to incur in arranging the financing.
In addition to interest and fees, keep in mind that following your purchase of the new home, you will have to pay the costs of carrying two properties -- such as property taxes, utilities, maintenance, mortgage payments, and so on -- until you sell your old home. These costs should also be factored into your budget.
Finally, always try to shorten the time between your purchase and sale in order to keep these costs to a minimum.
Best of Luck!
Victor M. Hussein, Real Estate Lawyer, 519-744-8585.