Visit Reed's Website

Have you witnessed this scenario? A client has his or her house on the market with an offer on another home — a contingent sale. And the client needs the proceeds from current house to make a down payment on the new one. 

Of course, this is a relatively common event, especially if someone finds a dream house that they feel they have to act on quickly.

What to do? An initial answer might be to get an equity loan on the current home and use the funds as a down payment for the new one, paying off the equity loan when the old home sells. In previous markets, clients could get an equity loan on a recently listed property — paying a hefty origination charge for the privilege. This used to be a common approach but most lenders these days require that the property not be listed for at least six months before applying for an equity loan. 

But there is another solution: it’s called a "bridge" loan. Bridge loans provide short-term financing and are taken out on the newly purchased property and paid off upon the sale of the clients’ listed property. Bridge loans are second liens, placed on a first mortgage.

Suppose a buyer has a home under contract for $500,000 and originally planned to put 30 percent down for a loan amount of $350,000. The buyer could instead apply for a bridge loan for 20 percent of the sales price, and put 10 percent down on the home. The loan would then have a first mortgage of $350,000, and a second bridge loan for $100,000 with $50,000 down.

When the first home sells, the $100,000 bridge loan is paid off with proceeds from the sale. 

Requirements for bridge loans typically include: the buyer's ability to make mortgage payments on both houses, based on their debt-to-income ratios, at least 10 percent down, and good credit.

Bridge loans aren’t for everyone. Not all buyers can afford two mortgages at the same time but if you have clients facing a similar situation, get in touch with a lender that makes bridge loans, and that just might help close the deal.

Written by David Reed, Texas-based mortgage banker with more than 20 years experience