Loan Programs
A Better Bridge part 1
By Dan Smith

A Better Bridge – part 1

The idea of bridge financing arises when you want to buy a new house, but your current home hasn’t sold. For many, this is a gut wrenching decision given that they feel they have just found the perfect home to buy, but can’t imagine how they can make the purchase work without the sale of their home. Historically the one solution used to be a traditional bridge loan from a bank. However this solution has a lot of issues. For one thing, the banks never allow someone to borrow more than 80% of the value of their current home in a bridge loan situation. That meant that the equity you needed to “bridge” the down payment to the new home was very limited. In addition the bank rightfully recognized the short term nature of the loan and was forced to charge a substantial set of fees, further eroding the access to your equity.

The new forms of bridge financing fall into two general categories. The first is the situation where the borrower can qualify for both house payments on a traditional income-to-debt ratio basis. The second is when they cannot. This first installment will deal with the former, and in this case you have a plethora of choices. For many who suspect they will experience delays in selling their home, one solution is to obtain a Home Equity Line of Credit (HELOC) prior to listing their current home. Almost every bank offers access to 100% of the equity in your home with a HELOC, and they generally charge absolutely nothing in the way of fees for it. The trick is to do this before listing the home for sale, because once the home is listed there is no bank that will allow a HELOC to be approved.

But let’s say you didn’t prepare for a potential bridge situation in this manner, and your current home is already listed for sale. Enter the new 100% financing options available at nearly every mortgage company you have ever heard of. While you normally might not have associated this phenomenon with the idea of bridge financing, you should. Most mortgage companies offer 100% options, which allow you to split the new financing into a first and second mortgage arrangement. So all you need to consider is what the correct first mortgage amount should be, based on what you are expecting to “net” from the sale of you current home. Then allow the new second mortgage (HELOC) to make up the difference, between the ideal first mortgage you ultimately will need and the purchase price. When the old home sells, you simply pay the new HELOC down to $0 balance. That leaves you with just the first mortgage payment you desired.

There are issues to consider with this plan. For one thing it would help if you could put at least 5% down, rather than finance all 100%. Most mortgage companies have a slightly higher rate on the first mortgage, when done in conjunction with 100% financing. But at 95% combined financing, the first mortgage rates remain unaffected. The other obvious caution is to carefully consider the long term impact of your current home not selling. While you may be able to qualify for two house payments, it does necessarily mean it is a financially prudent thing to do for an extended period. Make sure you have gotten honest advice in pricing your current home and know the average listing times in your market. In many instances you may be better off passing up the new home of your dreams, in order to avoid a financial nightmare.