What is bridge financing?

A bridge loan, also known as bridge financing, is a temporary loan that allows you to use the equity of your present home to pay the down payment of your next home even before your home sells. It is commonly used when closing dates are not aligned and you are in a competitive housing market with high demand. This loan is a quick and easy solution if you are financially stable.

These loans are usually between 3 to 6 months and can go up to 12 months, depending on your financial circumstances. A stable income and a good credit score are necessary to be eligible for this loan. The majority of lenders also need a minimum of 20% equity. However, some lenders will consider your income level and adjust the requirements accordingly. After those qualifications are met, you must make a sale agreement on your current home that contains the firm closing date and a purchase agreement on your new home in order to get a bridge loan.

The cost of bridge financing

While this loan is convenient and can provide comfort, there is a cost associated with this loan.

The cost mainly consists of three values:

1. Legal cost- Registering the loan requires your lawyer to do extra work so that they may charge more
2. Lender fee- Lenders need to set up the loan so that they can charge for the time it takes them to set it up
3. Interest rate- The bridge loan interest rate in Canada will approximately be Prime +2.00% or Prime +3.00%

To sum up the costs, a bridge loan usually costs between $1000 – $2000, but it also depends on a case-by-case basis and your circumstances.

Calculating your bridge loan

Now that we’ve looked at the cost of a bridge loan, how much can you get from a bridge loan?

To calculate your loan, take the amount of equity you have on your present home and subtract the down payment of your new home. Let’s take a look at a bridge loan example.

You have $150,000 equity on your present home, and your down payment for your new home is $50,000.

$150,000 – $50,000 = $100,000

Your bridge loan is $100,000 and is financed until the sale of your present home is over.

To get an accurate estimate of the sale amount available for your bridge loan and the approximate cost of your loan, be sure to use a bridge loan calculator.

Pros of bridge financing

Now that you know what a bridge loan is, let’s look at its advantages.

Buy your next home before the current one sells: The main advantage of this loan is that you get to buy your dream house even before your current home sells. This provides relief as you don’t have to stress over your home not being sold in time for purchasing your next home, especially if you are in a competitive area.

Financial Flexibility: A bridge loan also provides financial flexibility as it allows you to use the equity of your present home to pay for the down payment of your new home. If you find a house you love but can’t afford the down payment of it, this loan can be useful in covering the balance until the sale of your present home closes.

Find capital for renovations: if you want to make changes or renovations to your new home, this loan provides you with the funds and extra time that may be needed before you move in.

Cons of bridge financing

Despite how efficient bridge financing may sound, there are possible disadvantages that you should consider.

High-interest costs: Even though this is a short-term loan, the interest can get costly as the interest rates are generally higher than the interest rate you are paying for your mortgage. So evidently, the longer your loan is, the more interest you will have to pay your lender.

Need to qualify: Various factors, including income, credit score, and equity, determine the terms of your bridge loan. So, many aspects of a bridge loan may fluctuate, like the duration of the loan, interest rate, and requirements.

You must sell your home before the end of the bridge loan: This loan can lead to a higher risk because if your bridge loan exceeds the term and your present home is still not sold, you will have to pay for two mortgages until you can sell your home.

Who offers bridge loans?

Since more homeowners are using bridge loans, the well-known banks, including RBC, Scotiabank, BMO, CIBC, and TD, all provide their mortgage customers with the option to get a bridge loan. However, you can always reach out to your mortgage broker for more options if you’re unsure whether your bank offers bridge loans. A mortgage broker can help you find alternative lenders who may be more flexible towards home buyers with low credit scores or inconsistent incomes.

Alternatives to bridge loans

The most common alternative is the home equity line of credit (HELOC), also known as a second mortgage, which allows you to borrow against the equity in your house. The lender will then use your home as collateral to guarantee that you will pay back your loan. This is very similar to a bridge loan, except the repayment period can be as long as 10 years later.

If you have a stable job and a good credit score, another alternative is a personal loan which doesn’t require collateral and is usually funded more quickly. Certain lenders can give you a decent-sized loan with lower interest rates and fees. However, if your credit score is not superb, you can still qualify for a personal loan, but it may have higher interest rates and more fees.

Overall, bridge financing is a great resource if your closing dates don’t match up. However, you should contact your mortgage broker to find out the pros and cons that specifically apply to you.

The post How bridge financing can help you buy first and sell later first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

If you’re looking for an influx of cash, then it may be worthwhile to borrow money that’s secured by your home’s equity, otherwise known as a home equity loan. This method of borrowing can be much cheaper than other borrowing methods. That’s why about 10% of Canadian homeowners took equity out of their home in 2018 to secure a loan. The most common reasons for this loan were to fund investments, renovate their home, consolidate debt, and make purchases.

In this blog post, we’ll look at three of the most popular home equity loans: HELOCs (Home Equity Line of Credit), second mortgages, and reverse mortgages. This piece will outline the benefits and downsides of each and inquire into why they’ve gained so much momentum.

Home Equity Line of Credit

A HELOC works like any other line of credit would, except the debt is secured by your home. Like traditional lines of credit, you have the ability to withdraw what you need, when you need it. The money is also re-advanceable if you pay it back, and you’re not responsible for any interest on unused amounts.

However, they also commonly come with variable interest rates, which can go up as general interest rates rise too.

They’re great for situations where you don’t know how much money you’ll need, and it’s never a bad thing to have cash ready in case of an emergency. But the downside to a HELOC is that lenders usually want to see that you have good credit and income, as well.

A bank or lender can call the debt on a HELOC at any time. That is, they can ask the borrower to pay it back at any time—something most borrowers don’t understand about this line of credit. This isn’t likely, however, because calling the HELOC debt of millions of Canadians can end up hurting the bank’s own profits.

This fact proves something else: Canadians don’t fully understand the terms and conditions of their HELOC—which was also discovered by the Financial Consumer Agency in a survey that found participants usually scored less than 50% when answering questions about their loan. The survey also found that 25% of respondents only made interest payments on their HELOC.

Second Mortgages

A second mortgage is a loan that’s secured with your home’s equity, similar to a HELOC. But, instead of taking out money when you need it, the capital is provided as a lump sum. It’s common that a bank or lender will provide up to 80% of the appraised value of your home minus what you owe on your first mortgage.

This home equity loan is called a second mortgage because it’s ultimately second to your primary mortgage—i.e., in the event of a default, your first mortgage is paid out in advance of the second one. This is why the amount you can borrow depends on the home equity you have.

Unlike a HELOC, second mortgages can accommodate individuals with lower or less stable incomes or individuals with lower credit scores. The interest rate may be higher than a HELOC as a result, and the rate will definitely be higher than your initial mortgage since the second mortgage lender is in a riskier position. On top of this, there will be legal and broker fees to arrange the loan, adding another cost in addition to interest payments.  

It’s important to remember that a second mortgage will mean you now have two mortgages to pay off. If you miss a payment on either, it could result in the lender foreclosing your home.

Reverse Mortgages

A reserve mortgage is a great way for retirees to supplement their retirement savings or government income or to get a large sum of money for renovations, a grandchild’s education, or sudden expenses. To qualify for a reverse mortgage, you and your spouse both need to be over the age of 55.

The loan can come in the form of a lump sum payment or in monthly installments. And, no repayments are required until the home is sold. For this reason, a borrower typically does not need to plan how they’ll repay the loan because it comes out of the future proceeds of the home sale. In a reverse mortgage, you essentially give up equity in exchange for receiving monthly payments—the reserve of what you’d do in a regular mortgage. All the while, the qualifications to borrow this way are much lower than the qualifications required for a HELOC.

The convenience of reverse mortgages has resulted in its 20% annual growth. Though many criticize the tool for its high-interest rates.

A home equity loan can be a powerful tool. It effectively allows you to borrow money at a lower interest rate or with fewer obstacles by leveraging your home’s equity. This money is perfect when you need capital for home renovations, to pay for a child’s education, or to consolidate debt. The biggest downside is that you put your home at risk.

This blog post went over three kinds of home equity loans: A HELOC, which can provide easy access to capital at a low interest rate; a second mortgage, which can provide a lump sum payment without onerous income or credit score conditions; and a reverse mortgage, which allows retirees to leverage their home equity to supplement their retirement savings. There are others home equity loans out there and lenders are sure to create more.

The post Should you use your home equity to secure a loan? first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

What is a vendor take-back mortgage and how does it work?

A VTB is when the seller of a property also becomes the lender. The seller lends money to the buyer to purchase the property that the seller is offering. This provides the buyer with more access to capital and the seller with an easier sale. The seller, in becoming a lender as well, charges an interest rate that is usually more than what a bank charges but less than what a private lender charges.

For example, if a home is $500,000, a 20% down payment would be $100,000. If you only have $50,000, you could get access to another $50,000 through a VTB. The bank would then provide the remaining 80% or $400,000 to the buyer to purchase the property.

There are a few issues with VTBs. First, the bank has the right to prevent a VTB from taking place. The bank is still a lender, and they can choose not to lend if you are already borrowing from someone else. Second, the seller needs to at least own the amount of equity in the home equivalent to what they’re lending you—i.e., if the VTB is for 10% of the purchase price, then the seller must own at least 10% of the home. Additionally, a VTB is still a mortgage. As a result, putting down 10% of the purchase price with your own funds followed by a 10% VTB won’t provide you enough equity in the property to avoid mortgage default insurance, adding another payment to your home purchase expenses. 

Benefits and precautions to the seller

For the seller, the primary benefit of a VTB is to sell your property. Offering buyers a VTB is a great way to sell in a buyer’s market because it can incentivize a purchase without lowering your offering price. However, if you’re selling your primary home, you’ll still need a place to live. And if you’re not planning to downgrade, you’ll likely need the full proceeds from your sale to purchase a new property. But if you decide to lend the money, you’ll be rewarded with some generous interest payments.

If you sell a $7 million commercial property, there are only so many people in the area who can afford it. A VTB can enlarge your pool of buyers by offering them more access to capital. 

By doing this, there are also tax benefits. When you sell a property that isn’t the home you regularly live in, you must pay capital gains tax. With a VTB, you’re paid out over time which means you defer paying this capital gains taxes over the life of the VTB.

Keep in mind that you and the buyer don’t only have a buyer-seller relationship now, but also a lender-borrower relationship. Therefore, you’ll have a second contract to work out the terms of the lending agreement. This requires that you do due diligence on the buyer to make sure that they’re credit worthy. Your loan will be treated as a second mortgage, which is only paid back after the primary loan (likely the bank’s or private lender’s) is paid out in the event of a default.

Additionally, more agreements mean more lawyers. At least lawyer fees, anyways. Make sure to draft a contract with the buyer to set out the terms of the repayment. A lawyer should help revise this contract and read over the terms and conditions.

Benefits and precautions to the buyer

The ultimate benefit for you as a buyer using a VTB is the additional access to capital. Although you’ll likely pay a higher interest rate than if you borrowed it all from a bank, you may have bad credit or other impediments that prevent you from borrowing what you need.

Another scenario is if you’re purchasing a large investment or commercial property and where a bank may not lend you multiple millions of dollars. Without a VTB, you as the buyer would have to find capital through either investors, who would want equity in the property, or from private lenders, who likely charge higher interest rates than what a VTB offers.

But, for the typical residential property, VTBs are not common unless we’re in a buyer’s market—something rare in Canada’s housing markets

As a buyer using a VTB, you need to remember that this is another loan that you need to pay back. Therefore, it’s part of your monthly interest expenses and an additional liability in addition to any other mortgages you have. And as mentioned prior, the interest rate for the VTB will likely be higher than a bank’s interest rates. 

A VTB is a great tool to add into your real estate purchasing kit. It can help a buyer purchase a property when they can’t otherwise source enough capital to do so. It can help a seller get rid of a property faster, make more money in the long term, and defer capital gains taxes. But, as a buyer, make sure that you can afford what is likely an additional mortgage. And as a seller, double check the borrower’s credit history and make sure you have a contract ready.

The post What is a vendor take-back mortgage and how it can benefit you first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

In this post, we look at the reasons why people don’t qualify for an A-lender mortgage and at the alternative lenders and how to borrow from them.

Reasons why you may not qualify for a mortgage

A year and a half ago (January 2018), the Canadian government tightened the qualifications required for a mortgage. They implemented a “stress test” where homebuyers with a 20% down payment had to also theoretically afford certain principal and interest payment in case interest rates go up.   Ever since, more homebuyers — unable to satisfy this stress test — have flocked to B and C lenders to have their mortgages approved.

As the government creates new regulations and the economy and interest rates change, it will heavily influence who gets and doesn’t get approved for a mortgage. But this isn’t the only reason for a major bank to decline a mortgage applicant.

On a more case-by-case scenario, a common factor to mortgage rejection is poor or no credit history. A credit score is a number on the scale of 350-900, where 350 is bad and 900 is stellar, which explains a person’s spending habits. The score depends on history of debt payments, how long you’ve had a credit account for, new inquiries for credit, and other factors.

Quite frequently, first-time homebuyers are plagued with the poor spending habits of their younger self. This could have been a mismanaged credit card or high student loan debts, which would have resulted in a terrible credit score. Another issue is if the person has never had credit. This would result in no credit history that the lender could rely on.

There is hope, however. Even with a bad or missing credit history, individuals can still get approved if they have a guarantor or co-signer. This is someone legally liable for your loan payments if you default.

Self-employment is another common way that people find themselves unable to get their mortgage application approved. Due to the instability of their income, A lenders find self-employed people a greater risk. Thus, the bank may require a higher taxable income or a larger down payment to approve of someone who is self-employed.

Lastly, many people make financial mistakes, and this can result in bankruptcy. People who have declared bankruptcy in the past few years likely won’t get approved by any major bank and will have to seek help from a B or private lender.

The alternatives

While A lenders consist of the major banks, like RBC, TD, CIBC, etc…, and the major credit unions, there are many more organizations willing to lend money. Just because you’ve been declined at an A lender, doesn’t mean you’ll have to head to a sketchy alleyway and find a loan shark that charges a 30% interest rate. Alternative lenders have a lower barrier to entry in exchange for a higher interest rate. They also commonly charge a processing fee that’s 1-2% of the mortgage and a brokerage fee, usually 0.5% of the mortgage.

Often, using an alternative lender is not a permanent fix. Many borrowers use an alternative lender as a way to rebuild their credit and then apply for an A lender later on.

B Lenders

Contrary to what one might think, there are dozens of banks in Canada. Many of these smaller banks, such as Equitable Banks or B2B Bank, allow clients to miss one or more of the components that the big banks look for in a client. For example, they may approve someone even though they have a bad credit history if the applicant has a stable job and no recent bankruptcies. B lenders also more heavily consider the property being purchased in offsetting default risk.

There is no need to fear B lenders. B lenders are still reliable organizations, commonly listed on the stock exchange, and have millions of clients worldwide. They are also approved by the Canadian Mortgage and Housing Company as a mortgage lender.

C Lenders (Private lenders)

Private lenders are a last resort, only occurring once a B lender has turned you down. These lenders are often rich individuals or a group of individuals who lend out their own money for a better return. As private lenders take on even riskier clientele than their B-lending counterparts, they charge a higher interest rate, as well. You can expect interest rates anywhere between 10-to-18% and possibly even more.

The barriers to entry for these mortgages are lower than that of B lenders. Instead of approving a mortgage only on credit scores and occupations, a private lender weighs more emphasis on the property type and value. If you’re refinancing a home, they also consider the amount of equity you already have. This isn’t to say that other lenders don’t consider the property itself, but that private lenders care more about it.

Lastly, because you may not be dealing with a massive and trustworthy corporation in the private lending landscape, it’s best to have a lawyer thoroughly look over any documentation.

How to get a subprime mortgage

The term “subprime mortgage” shouldn’t scream horrors of the 2008 recession. Subprime mortgages are realistically a part of everyday life and refers to any loan granted to those with a poor credit score. The mortgages provided by B and C lenders are usually subprime mortgages.

So if you’ve decided to get one, where should you start? Unlike A lenders, B and C lenders do not have a brick-and-mortar store at the corners of every major intersection. And while you could scour the websites of every B-lender bank looking for the best rate, it may be more efficient to contact a mortgage specialist.

Mortgage brokerage or freelance mortgage specialists help homebuyers navigate the alternative lending market. They have access to multiple lenders and their mortgage rates, and they can even negotiate a lower rate for you. With their expertise, they can also find the lender that is most suitable for your situation. However, they take a percentage of your total mortgage as a commission, which can result in motivation for them to approve you for a mortgage you shouldn’t be approved for.

Online mortgage brokers are now also a popular method to scour the B-and-C lender landscapes. These brokers cut margins by operating online and pass the savings onto their customers. Using technology, they can find out who the best lender is for you.

If you’ve been denied by a major bank for your dream mortgage, there’s still hope. Though it may cost a bit more in terms of interest, it’s only be temporary until you get your credit back on its feet. B and C lenders can help you get one step further to do what you thought was previously impossible.

The post The Ultimate Guide to B and C Lenders first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.