Posted: 7 May '17

Buying a Home Before Yours Sells: Is Bridge Financing is a Good Idea?

Buying a Home Before Yours Sells: Is Bridge Financing is a Good Idea?When transitioning from one home to another, the closing of the two sales do not always coincide. Oftentimes, the closing date of the sale of your old home occurs after that of the home you are purchasing. This can leave you without the money to make a down payment on the new home since it remains tied up in equity. Many turn to bridge financing to overcome this issue; bridge financing temporarily funds the purchase of the new home until closing the sale of the old one. Bridge financing can be a very useful tool for ensuring your transition, but it can also be expensive and risky if not undertaken with care.

What does bridge financing look like?

Bridge financing is a short-term loan, typically between a couple weeks and 4 months long. The time is different for each person and situation as it depends on the delay between your new home's closing purchase date and your old home's closing sale date. The purpose of the loan is to give you the money you need to purchase your new home, even while your funds are still tied up in your old home's equity.

The Risks of Bridge Financing

One useful way to think about bridge financing is a bridge across a river, with your old home on one side and your new home on the other. You must make sure this bridge is long enough to reach the other side and doesn't collapse too early

In real terms, the length of the bridge is the time you need the loan to reach the sale of your old home. Borrowers that do not have a buyer and date lined up for the sale of their old home must be wary, as bridge financing can become very expensive over the long term and put one at risk of being unable to finance the loan. Even with an agreement for sale, borrowers should gauge the risk of any factors which could delay or impede the sale before entering into an agreement for bridge financing. Additionally, if borrowers become unable to finance the bridge through to the date of sale of their old home, this could lead to the bridge collapsing.

These cases can be disastrous to borrowers. If they become unable to finance their bridge loans, they will risk defaulting on their mortgage. This could potentially lead to a situation where they have sold their old home and are unable to pay for their new one. On top of being left without a home, their credit rating will be negatively impacted, leaving them in a very tough situation without having access to the funds needed to get afloat once more.

For these reasons, it is crucial to speak with an experienced advisor to enable you to have a smooth transition to the home you want without putting too much stress on your finances. For Bridge Financing in Edmonton, talk to the mortgage experts at BMC Mortgages. We'll discover out if bridge financing is right for you, and make sure you get the best possible terms for your transition.