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A Bridge Far Enough
A common real estate event is the need for someone to buy a new home before the old one is sold.
Maybe you put your current home on the market, and planned to wait as long as necessary for it to sell before buying. Then, by accident, you drove by the perfect new home, and want it in the worst way. Even in a slower real estate market, offers contingent on the sale of another house are rarely accepted.
Or, perhaps you contracted for a brand new house, and figured your existing home was certain to sell in the six months it would take to build the new place. Oops.
Since these things are common occurrences, the financial industry -- sharp, responsive, inventive, and dedicated to customer service and satisfaction -- must have a painless way to accommodate the need.
Heh, heh.
Few common financial needs are less well met. This deficiency is strange: financing the second house is easy from a risk standpoint, and there is all the money in the world available to do the job. The problem is terminology. Bankers have not yet agreed on a precise name for these loans, and so can't communicate with consumers.
The generic, slang term is "bridge" loan. It's a descriptive name, reflecting a bridge from one house to another, but it's not precise. The original meaning of "bridge" loan referred to one, narrow practice: pulling equity out of the unsold house to use as down payment for the new one.
This "equity-pulling" bridge was used in an off-hand way until the Fall of 1979. Until then, lenders were relaxed about borrowers who wanted to carry the mortgage debt on the first house, the cost of the bridge, and the new mortgage on the new house, especially if the first house was already under contract for sale. Lenders figured that the sale of first house was likely to close soon, and if it didn't, the overextended sellers would discount their way into a new sale.
The Fall of 1979 was an eye-opener. A legendary, Paul Volcker-engineered "Saturday Night Massacre" at the Fed in October caused mortgage rates to rise from 10% to 13% in eight weeks. Sales blew up everywhere, and new buyers couldn't be found. Bridge loans became painful, long term financial craters.
Since then, if you have wanted a bridge, you have to fit the payments on the existing mortgage, the bridge, and the new mortgage within the normal 38% (or so) of income. There are ways to stretch the rules, but most folks can't qualify to carry that much debt.
Which leads to a different kind of bridge loan, which might be called an "acquisition loan." Instead of closing your normal, long term mortgage (for which you can't qualify) to close the purchase of a new home, you get a temporary loan from a bank for 80% or more of the purchase price. You take your down payment from savings, from an equity loan against your existing house, from a 401k borrowing, or maybe from family. As soon as your unsold house sells, you refinance the acqusition loan with a long term mortgage.
The acquisition lender is usually a bank, which doesn't have to follow hard-headed Fannie Mae rules, and is used to making high risk, short term loans. These are easy to get, if you have a sound financial statement. They can be exciting, since they are tied to prime (perhaps one or two percent higher), just like a home equity line of credit, and the rate floats with no limit on the altitude of future adjustment.
Just for fun, I called a few banks to see what would happen if I asked the first voice for a bridge loan. Cold: no referral to a particular lender, or bank officer -- where in the bank would I be referred? No bank got me to a person who knew (vaguely) what a bridge loan was in less than five voice mail transfer tries. If you think you need one of these gadgets, ask a Realtor or mortgage lender for a specific person with whom to talk.
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