What to Do If You Have Bought a House But Can Not Sell Your Existing Home
Mortgage alphabet
Right now, there's an interesting standoff playing out in the real estate market - rates are coming down, sellers are listing their properties, prices are essentially holding steady, and buyers, despite pent-up demand and a genuine need to buy, keep waiting for rates and/or prices to fall even further.
Nobody wants to give up ground, whether that means slashing their price significantly or simply giving in and buying at today's prices with financing at today's rates. In this environment, we're increasingly hearing from clients who bought a property a few months ago, or from a builder, and now can't sell their existing condo or house in time to close on their purchase, since most of their down payment is tied up in that sale.
Most banks offer what's called bridge financing, which helps in exactly this situation, when your existing home has been sold but hasn't closed yet, while your purchase is set to close first. The key word here is "sold" - meaning you have a signed offer on your existing home, with all conditions met or waived, but the closing date on that sale falls after the closing date on your new purchase. In this scenario, the bank issues a mortgage on standard terms for the new purchase, and uses a bridge loan to cover the down payment that isn't yet available until your existing sale closes.
Bridge financing is typically taken for a short period, up to a month, and costs roughly $500 to $750 in administrative setup fees, plus Prime+4 or 5% on the bridge amount itself. A bridge loan is fully open, with no penalty for paying it off. It's possible to arrange bridge financing for longer than 30 days, but that can bring additional legal costs, since the bank will require the bridge to be registered on the property's title. Most people try to keep this type of financing as short as possible, since it's considerably more expensive than a standard mortgage (compare Prime-1% on an average variable mortgage to Prime+5% on a bridge).
People also often use a bridge loan deliberately, to give themselves time to comfortably renovate their new home and/or move without added stress, while still living in their current home in the meantime.
An example:
The Novoseltsev family, living in their condo, welcomed a second child, and in May they made an offer on a townhouse with a closing at the end of July, got their mortgage approved, completed the inspection, and put down a $50,000 deposit. When they listed their condo for sale, the market slowed down even further, and despite every effort from the Novoseltsevs and their realtor, the unit sat on the market for a long time without selling. Only after the Bank of Canada's second rate cut on July 24 did the Novoseltsevs finally get the offer they'd been waiting for. The price wasn't ideal, but it was acceptable - though the buyers couldn't close on the condo before mid-August at the earliest. The Novoseltsevs were quite upset, but once we told them about bridge financing, they were able to relax - and not only did they close on their townhouse on the scheduled date, they even had time before moving in to do some cosmetic renovations, set up the nursery, and fix up the fence so their beloved dog, Klyaksa, wouldn't wander off in her new surroundings!
But what happens when life throws you a curveball and your existing home simply isn't selling, while you still need to close on the home you've bought? What would have happened to our Novoseltsevs if they hadn't managed to get an offer on their condo before the townhouse's closing date? Would they have lost their fifty-thousand-dollar deposit, and possibly even been sued by the sellers for additional losses on top of that?
No! Since our clients' condo had built up enough equity, that equity could have been used for a different kind of bridge, arranged instead with alternative or private lenders, since in that scenario the Novoseltsevs would no longer have been able to qualify with a conventional bank for the house while still holding an unsold condo.
A bridge loan of this type would be issued against both the purchase and the equity in the existing condo simultaneously, in order to cover the down payment.
Yes, this option is more expensive, and there's an additional fee to pay, which is why it's only used for urgent, short-term situations - but it lets you close on your purchase, avoid losing your deposit, and avoid the risk of a potential lawsuit. Once the deal closes, clients are able to sell their existing home without added stress and refinance the pricier alternative or private mortgage into the best available bank rate within 2 to 3 months, or even sooner if the sale happens faster than that.
Alternative or private mortgages are increasingly being used today well beyond just the scenario described above. This is often tied to interest rates that remain high, making it harder to qualify for the mortgage amount needed, as well as tightening rules and requirements at the big banks, which are governed by regulators. Clients who would have been considered rock-solid "bank" borrowers just yesterday are getting turned down by their banks today.
This applies not only to the self-employed, but to salaried employees as well. Whether it comes down to insufficient income, a credit score that isn't quite high enough, or overly strict requirements around rental property, the bank ends up having no choice but to decline the mortgage.
So what do you do if you can't get a mortgage at a major bank? Do you have to go straight to a private lender, or do you simply have to give up on the idea of buying a property or accessing equity in your home through a refinance?
Having worked in Ontario's mortgage lending market for more than 20 years, we have access to what are known as alternative banks, which occupy the space between the major banks and private financing. These banks have simpler mortgage approval rules, can take additional income into account, and work with clients who don't have a flawless credit history.
Interest rates at alternative banks tend to run higher, but the contract terms are shorter (1 or 2 years), which, with the right planning and an improving financial picture, lets clients move on to the best possible terms once that mortgage term is up.
While many prospective homeowners turn to alternative lenders because of income shortfalls created by the government's stress test, or because their credit score isn't quite high enough, some borrowers run into additional paperwork issues or urgent circumstances of their own. In situations like that, we can offer a wide range of private lenders who specialize in different segments of the market.
Lenders of this type are far less concerned with your income. They focus instead on the value of the property and your plan for refinancing once the contract term expires (typically 1 year). In exchange for a much simpler approval process, private lenders expect higher interest rates and some additional fees for arranging the mortgage. It's worth noting that rates and terms among private lenders can vary considerably depending on the situation, the scenario, and the type of property involved. That's why it's so important to work with a mortgage broker who has access to a wide range of private lenders and understands their individual requirements and preferences.
Alternative financing can be quite advantageous for business owners who work hard to minimize their taxable income and want to improve their credit score in order to eventually return to conventional financial institutions.
While having a strong credit history certainly matters, a mortgage is still very much within reach even for those whose credit isn't quite as polished.
And don't lose heart if the bank you've banked with for years turns you down for financing - an experienced mortgage broker may not only arrange financing for you, but also help you save thousands of dollars on your mortgage payments. And most importantly, alternative financing can make your dream of homeownership a reality, or provide the funds you need for current expenses and new projects!