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Do
you need your equity NOW to buy |
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If
You’re Asking This Question, You’ve Heard Someone Mention A Bridge
Loan
Well, I hate to be the one who tells you this but there really
isn’t any such thing as a “bridge loan” in the home lending
business.
Now that I’ve said that, let’s go back and look at your
particular situation (or the situation that you sense you might be
moving towards) and determine how to meet your objectives as smoothly as
possible. (After all, you really didn’t want to buy a bridge so why in
the world would you really need a bridge loan?)
You were probably out one nice Sunday afternoon just taking a
ride with the family and you decided to stop in at this neat looking
home with the “Open House” sign plastered throughout the
neighborhood. OR ...
You were just glancing at the Real Estate section of your
favorite newspaper when you noticed a great looking home for sale in one
of your favorite neighborhoods... Whatever!
It all started out innocently enough. You never really thought
that seriously about making a move. Now you think you’ve found a great
house. It almost seems too perfect! The only thing wrong is the timing
- or, maybe the better phrase is the logistics.
You know that you can’t possibly buy a new house until you have
sold your current home so that you can get all of your equity to invest
in this great new home.
Under normal conditions, you think of yourself as pretty rational
when it comes to making life altering decisions. But when you looked at
that house you realized that “destiny” put you there ... you know
that this is just the perfect house for you and your family!
You’ve got great credit and your income will actually support
your loan - even if you
have to include your current house payment.
So now you’ve made the decision to go forward with purchasing
this home. What is the best method to get the equity out of your current
home so that you’ll have enough money for your down payment and
closing costs on the new home? You’re going to need some type of
special financing to create a cash bridge from your current home
to your new home. (I guess that’s where that phrase “Bridge Loan”
came from.)
The first step in getting some of your cash from the sale of your
current home is to set up a home equity line on your current home.
Notice that I said your first step. You guessed it — there’s more to
it than just simply getting a home equity loan on your current home. Remember
that you probably need all of the equity out of your house. That would
suggest that you need a 100% loan to value on your current home. Home
equity loans are typically maxed out at a limit of 80% of the value.
That 80% is the first and second mortgage. You also need to remember
that you will have some difficulty in arranging any loan on a house that
is on the market for sale. Banks don’t want to make a loan on a home
that is being offered for sale. The fact that such a loan will be of a
short term nature means that the bank won’t make much income on such a
loan.
Remember that the long term idea is that you will get a first
mortgage on your new home which you will be paying for the full term of
the loan or until you sell the house. A home equity line is nothing more
than a second mortgage. You’ll get a home equity line on the new home
which will provide funds for you until you sell your current home. Once
it’s sold, you’ll be able to pay off your home equity line. By
working with this series of home equity lines, you’ll be able to
assemble the cash you need to buy the new home. It’s
Not Just The Knowledge – It’s the Know How!
It’s not just the knowledge (as to how do structure a “bridge
loan”), but the “know how” may be even more important. The
distinction (at least in my mind) is that having the “know how” implies
a certain amount of first hand experience. Earlier I mentioned the fact
that there are many different logistical hurdles.
As you can imagine, it can be quite a balancing act to juggle
three or four different banks and mortgage companies. Each bank will
have its own guidelines and different requirements. Successful closings
without any last minute surprises mean that one must carefully navigate
among each banks requirement.
One example of just how critical this can be is demonstrated by
reviewing Bob and Carol’s transaction.
Bob and Carol found the perfect home just down the street in a
neighborhood where they already knew many of their future neighbors and
their kids. They were scheduled to close at the end of the month and had
arranged movers, utility companies, etc to accommodate that closing
date.
The folks selling the new house to Bob and Carol were planning to
take their proceeds check in the morning and head right on down to their
lawyers’ and close on their new house.
Bob and Carol were pleased when their loan applications were
approved. They felt that every thing was going to work out perfectly.
Nobody warned Bob and Carol that the second mortgage which was to
be secured by their current home was legally regarded as a
“Refinance” transaction. There are some implications relating to a
refinance transaction. In Bob and Carol’s situation, any refinance
transaction must provide the borrower a 3 day right of recession -
whether Bob and Carol wanted it or not! That is the law and it’s not
open to interpretation. Did I mention that Bob and Carol had
strategically planned to close on Friday at the end of the month just so
they would have the weekend to move?
By the way, the three day right of
recession means three BUSINESS days! Bob and Carol were stunned
when they learned that they wouldn’t have any cash from their
“Bridge Loan” on the day they needed to close on their new home.
As you can tell, from Bob and Carol’s situation, it is critical
for someone to have the knowledge and the know how to properly deal with
all of the different banks and mortgage companies who will be involved. |
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