Why Bridge Loans Are A Pain In The Rear

You finally found it. After months of searching, and an ever-growing family, you found “the one” that will suit all your needs. Bigger, better, newer, and any other attribute you could name, this one has it. What a relief. You set a closing date 3 months out and post your house up for sale. It’s ideal for first-time buyers so you should have no problem selling it, either. You list your house for sale, and naturally three offers come to the table. After speaking with your Realtor, you decide the best course of action is to sell one week after your purchase date, and take a bridge loan to cover the difference. Relief sets in.

The above scenario is played out hundreds or thousands of times per year in our real estate market. It makes sense. Why not sell your house after you move into the new one, thus giving you time to do any upgrades, cleaning, and to do your move over a period of time rather than in one day. Makes total sense, right?

Here’s why this doesn’t always work out as planned: Some lenders are no longer covering closing costs as part of the bridge loan. What does this mean? If you’re buying in Toronto you know what this means: Double Land Transfer Tax. This will add a huge bill to your already growing list of expenses that you must cover. Let’s look at a real-world example of what I mean:

You bought a house for $700,000 with 20% down.
You put down a $50,000 deposit on offer.
Your total down payment is $140,000 less the $50,000 you have put down, so $90,000 left.
PLUS: Land transfer tax in the range of $22,000 plus legals and closing costs. Make it $25,000 give or take.

You sold your condo for $350,000, and your mortgage outstanding is $150,000. Leaves with approximately $200,000 less your real-estate commission, so let’s call it $190,000 to be even. Looks like the lender could loan you the $90,000 plus closing costs right?

Nada. Not always.

Lenders have their own internal guidelines for bridge loans and are loathe to the risk because we do not know for sure of that sale will close. Although the truth is that if you match the closing dates there’s no guarantee either, but if that happens, then the lender on the house won’t proceed with the mortgage for the purchase. If the sale falls through after the purchase, then now we have a whole huge problem to get by - i.e. re-listing the house and having the lender wait to get their money out of the bridge.

When a client wants to do a bridge I always advise them to make sure they have a cash float or access to one for a scenario like the one above. We can never guarantee what will happen but having access to funds is crucial in a time like this - especially if the lender does not want to roll in the closing costs into the total loan.

Good luck out there and make sure you know your numbers!

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