Bridge loans

Bridge loans are harder to find since the financial crisis.

Often a buyer will need to sell an existing property in order to have the down payment necessary to purchase a new one. If the timing doesn’t work – if the new property is found before the old one is sold – the buyer will have to find an alternative source for the down payment. One possibility is a bridge loan – a loan that is secured by the equity in the buyer’s old property. Because bridge loans are short term, they generally have higher fees and interest rates than home equity lines of credit. Bridge loans have become harder to find since the financial crisis.

As the real estate market has heated up, fewer sellers are willing to accept the sale of a buyer’s previous residence as a contingency in a purchase contract. This puts some home buyers in a difficult position. They either have to sell before they know whether or not they are going to have a place to purchase, or they have to come up with the necessary funds to close on a new purchase without having the funds from the sale of their current residence, their ‘trailing home’.

This post housing-crisis mortgage market presents two hurdles to someone who wants a bridge loan. The first is that home equity lenders have become more conservative, the second is that the bridge loan may now make it more difficult for a buyer to qualify for the loan on a new purchase.

Alternatives to a Bridge Loan:
  • Put in place the largest home equity line of credit available before you list your home for sale (lenders will not provide a home equity line on a listed property).
  • Look into the possibility of a margin loan against your securities portfolio.
  • Ask your real estate agent about the possibility of selling your property and renting it back to give you time to find a new place. In a seller’s market, buyers may be amenable; however, if the buyer of the trailing house is getting a mortgage, the new lender will not permit a rent back of longer than 60 days.
  • If you have some cash available without selling the trailing house, it may be possible, if you qualify, to get a home equity line on the purchase. For example, say you are buying a new million dollar home and planned on putting 35% down – $350,000 – from the net proceeds after your home was sold. You have $100,000 in savings and can borrow $50,000 against your 401k. You buy the new home with $150,000 down, and get a $200,000 home equity line. When the trailing home sells you pay back the 401k loan, pay the equity line down, and replenish your savings.
  • A private money lender may make a bridge loan. Expect to pay high fees – a 2%-3% loan fee and a rate over 8% are standard. My advice is to look at a private money bridge loan cost as part of the price of your new home. For example, if you need a bridge loan and you think that the total cost will be $10,000, add that $10,000 to the price of your new home and ask yourself if that new home is still worth the price. I am now working for a private money lender, and may be able to help if the purchase is in California.

In the past, bridge loans were done simply and inexpensively based on the equity in the buyer’s trailing home; if that house was listed for sale, neither the bridge loan nor the primary mortgage were considered when the buyer was qualifying for a new purchase. This is no longer the case. Now, new regulations require that a lender consider the entire mortgage obligation of a buyer who has not yet sold his prior residence. In other words, buyers must now qualify based on the sum of both mortgages, even if they have substantial equity in their old home, or if it listed for sale. There are some lenders which will consider the potential rental income of the trailing home when deciding whether a buyer qualifies. If any of this applies to you, you may want to speak to a mortgage broker.