Types of Real Estate Loans
There are two types of
situations that call for bridge ( Swing) loans:
Planned and unplanned.
Both have a number of options, and each situation should be carefully
evaluated to be sure the desired transaction can close on time, and at a minimum
cost to the borrower. Planned
is usually easier than unplanned.
Well-planned months or years in advance…Recommended.
Buyers live in a $250,000
home that they owe $150,000 against.
By planning ahead they take out up to $100,000 (100% of there equity)
with either a new first, a fixed equity second, or an equity line.
How much credit is available to them depends on their credit,
documentable income, and the rate they are willing to pay.
If the credit is excellent the income will be less of an issue. This
transaction should take place before their existing property is listed for sale.
Most lenders will not make such loans if the property is currently listed
for sale, or if they will, may charge a higher rate or higher fees.
If the existing 1st
rate is high relative to what is currently available, they may want to get an
adjustable 1st to keep the cash flow under control.
A prepayment penalty is to be avoided at all costs.
Such loans may be available with zero points, and/or EZ doc features.
On the new $500,000
purchase, the borrowers will want to put say $50,000 down, get a new HELOC for
$50,000, and get a new 1st for $400,000.
When the house sells, the remaining equity can be used to pay off the
HELOC, or do planned home improvements. As
all loans, this is easier with good credit, good income, and money in the bank.
It enables the borrower to get into the house without paying a premium
for 100% financing. There is no PMI,
and the transaction may not cost any more than the single transaction would
have. This scenario may be set up years in advance.
On your client and prospect list I suggest that you encourage all
potential sellers to set themselves up with a line of credit.
Many of them are available with little or no cost to set up, and are
useful for other purposes as well. If
credit is not so good, than there is some time to deal with that as well.
Scenario 2: Not so
Your buyers have their
house on the market, have some cash, but have found a great opportunity.
Or…their house has sold, and then fallen through at the last minute, but they
still want the new house.
It is here where the motivation needs to be strong. The buyers may be able to get a new loan on his house to facilitate the sale. Here’s where it gets interesting. Many lenders will not lend on a property that is currently listed, or that has been listed within the last 12 months. Sometimes simply by removing the sign for the appraisal you can get by if the appraiser does not check, but this could be risky if time is of the essence. Equity becomes more important, and choices may be limited to private or alternative financing.
This is when you may want to look for other avenues. Do they have relatives that could help? Do they have other property, a car or motor home, etc, that they could borrow against? They need to not get too hung up on the interest rate. 100% financing is an option, but many such loans have higher rates, and since they will have the loan on the new home for some time, it may be better to arrange for short term financing, even if it costs more in the short run. If they can come up with 5% down of their own money they should consider an 80-15-5. The five percent can come from funds secured on property.
Private funding is available. These are secured by Trust Deeds on real property. An escrow is not always required, but is recommended. Title insurance is required on all loans that I handle. The investor will usually charge 2-5 points, depending on the loan amount, credit, and equity. The note may carry interest as well. If you have an equity line yourself you may be the lender, and we have a doc service that can prepare the documents for you.
Be careful. If you know the borrowers personally they need to know that this is an investment for you. If they do not make the payment on the first or the second mortgage you will be forced to foreclose, resulting in substantial damage to their credit. I will tell them the same thing. A default will result in a foreclosure. Don’t ask for any favors. This is my retirement you’re playing with.
A general rule is, if you have to think about it, don’t do it. A first payment default is particularly serious, although these bridge loans may be structured without payments.
Additional documentation. If the loan that the buyers are obtaining on the new property requires the down payment to be documented, as most do, we will need to provide closing papers from this loan. This is no problem, but since most borrowers will not qualify for 2 full payments, a rental agreement will need to be provided. This will give the buyer added income to help him qualify for the loan. In general, most buyers plan to rent the home until it is sold and closes escrow. The rental income must be considered “Normal” for the area. Don’t try to say that $250,000 house rents for $5,000 a month. It will not fly. Rarely a lender will require a copy of the rental deposit check. (I’ve only had this happen once in 11 years)
Also, if the seller of the new home plans to rent back for any length of time, the lender does not want to know about it. Do not put it in your purchase contract. Why? Because many lenders have the buyer sign an occupancy agreement saying that they will occupy the property within 30 days of close of escrow.
So another version of this
Keep in mind that this is an overview. Many versions are possible. I do suggest that you have a home equity line available to you for the occasion that it may help you save a deal. In general, we try to use the Bridge loan concept to maximize the financing opportunities of our customers. IF a 95% or 100% LTV loan is too expensive for the borrower, we try to structure what we have to avoid this. It also occurs that many borrowers do not qualify for the higher LTVs, or require alternative or EZ documentation. This does work with Alt A and B paper, but the LTV constraints may be more extreme, and the rates may be higher.
Talk to us about your scenario.
1st & 2nd
Mortgages & Alternative Home Financing
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