Is Interim or Bridge Financing an Option When You Need to Sell Your Home Before Buying  Your Next One?

So, you are thinking about buying a new home on Vancouver Island, but you need to sell your current home first.  What are the chances that the dates of selling your current home and buying your new home line up?  While it does happen, it depends on several factors including: the inventory levels of homes in Greater Victoria, your budget and what you are looking for (i.e.  a single family, condo, townhome or duplex).  If the real estate market is hot, you may be competing with others and negotiating dates that work for you may make your offer less appealing to the sellers.

If you are in a situation where you need the money from the sale of your current home to purchase your next home, there are options available like “subject to the sale of your home” offers  or interim financing.

What is bridge financing?  Bridge financing is a short-term financing tool.  It helps home buyers to “bridge” the gap between an old and new mortgage, by allowing them to tap into the equity in their current residence as a down payment, while essentially owning two properties concurrently as they wait for the sale of their existing home to close.

According to Duncan Gardner, a mortgage broker with Great Pacific Mortgage & Investments in Victoria, BC; most large banks, credit unions and other institutional lenders do a very specific type of bridge financing, but they have a clear criteria for what they’ll accept. These types of lenders will want to see three things in order to approve bridge financing.

1. The lender will require a firm agreement (contract of purchase) on the property the borrower is selling in order to use the equity from that property as a down payment for the new home they want to buy. This will mean all conditions will have to be removed on the property they are buying and also the one they are selling.
2. Institutional lenders tend to prefer their bridge loans to be smaller, and anything over $500,000 would typically require an exception. To have an exception approved, it will depend on your covenant. They’ll want to see well-paying, stable employment, very strong Beacon Scores, low consumer debt, etc. If any of these covenants aren’t top notch, you run the risk of having the bridge financing fall through.
3. Additionally, most institutional lenders limit the bridge loan term to 30 days. Institutional lenders typically offer bridge loans at prime +2% and charge a small processing fee.

Often bridge financing doesn’t work as you may not be comfortable putting your home up for sale until you know you have found your next home. And even if you find your new home, selling your existing home may take longer than you expect. Unfortunately, lining up the timing of an accepted offer on the home you are selling with the house you are buying can be challenging.

However, there are some additional options for home buyers who need to sell their current home to finance the purchase of their new home.

Interim financing typically refers to the type of loan made when a contract exists for the purchase of the new home, but the existing home has not yet sold.

“As a private lender, we loan our funds out with a more common-sense approach, “says Duncan. “We don’t require a firm agreement on the current property. We don’t require your interim loan to be under a certain amount. We don’t require the interim bridge to be 30 days or less.” His company offers another solution as a back-up plan.

“If a client owns their current home outright (or with a small mortgage), and the total loan to value between the two properties is under 70 to 75%, we can provide them with interim financing,” explains Duncan.  “Our rates are not too much higher than the banks, our fees aren’t larger than anyone would experience when getting an insured mortgage, and we can even potentially have an interest reserve built into the loan, so our clients don’t have to make any monthly interest payments, the additional funds are simply taken once their property sells.”

While private lenders may be a little more expensive, if you are wanting to buy your next home before you sell your current home, interim financing through a private lender is something you may want to have lined up.  It just might be what makes moving into your new dream home possible.

If you have questions about buying and selling real estate, whether it’s a condo, waterfront home, or vacation property home in and around Victoria, BC, just  Contact us  – we are here to help.