Help for Landlocked Homeowners.
A few months back, we discussed one of the not-so-pleasant effects of the rapidly escalating San Carlos real estate market: Many potential sellers in San Carlos who were looking to upsize and still stay in San Carlos were finding that they either had to sell their existing home first before they could purchase the next home, or they had to make an offer on the second home that was conditional on them selling (and closing) the first home.
Well, neither option is remotely appealing. Selling one’s home without having the next home clearly identified and locked up is somewhat akin to walking a tightrope without a net — if you mess up that next step, life is going to change in a negative way for you. And with regards to the other option, getting a conditional offer accepted in a competitive market like this is about as likely as finding an empty bar stool at Town on a Friday night. Not gonna happen.
So we referred to these homewoners as “landlocked sellers” because they would love to move up to a large home, but the market conditions are forcing them to stay put. And as we discussed in that post, it’s one of the reasons why there has been so little inventory to choose from this year in San Carlos since their existing homes are potential listings that will never see the light of day.
But there may be some good news on the horizon for our landlocked sellers. A financial tool known as bridge funding is quietly making a comeback into this market, and it may be just what the doctor ordered for at least some of these sellers.
What is Bridge Funding?
In its most primitive form, bridge funding is simply the act of borrowing money against your existing home to give you extra capital to put together an offer on your next home — or in other words, providing you “bridge” to purchase the second home. It’s a practice that became virtually extinct with just about every other type of loan after the credit crash of 2008. But now that the economy is humming along once again, banks are looking for ways to make more loans and to service (aka, make money from) their clients in creative ways.
The most common form of bridge funding is simply a short-loan that’s secured against the first house to provide liquid funds to help purchase the second house — this is referred to as a “bridge loan”. The bridge loan is then paid off from the proceeds of the sale of the first home. Here’s a perfect example of how this could be used:
A family of 5 is living in a cramped 3BR home and they’re desperately looking for more space. They have good credit and decent equity in their existing home, and would probably easily qualify for a larger loan — but they don’t have enough money to meet the down payment requirements of the new loan. They could sell their home to get the funds for the down payment, but they don’t want to run the risk of being homeless if they can’t find another place right away. So they’re stuck…
A bridge loan would give them the funds for the down payment on the second home, and might even make the loan on the second home smaller. They purchase the second home, then sell the first, and the bridge loan is paid off from the proceeds of the first sale.
Pretty simple, right? There are many other examples of how this type of funding can be used to decouple the two transactions. Because only a few specialty lenders are actively marketing bridge funding, their offerings are often quite different and can be somewhat complex. One lender I work with has four different bridge options for home buyers today. That’s exactly 4 more than were available just a few years ago.
Is Bridge Funding Right for You..or Vice Versa?
Like anything else good in life, this doesn’t come free — nor even cheap, for that matter With most bridge options, there’s usually an origination fee associated with the loan, and you’ll pay interest on the amount that you borrow at a rate that’s somewhat higher than the prevailing rate for conforming and jumbo first mortgages.
Also, not all buyers will qualify. Generally speaking, the stronger a buyer is in the areas of credit scores, income level, and equity in their existing home, the more options will be available to them. A qualified mortgage loan agent who specializes in these types of loans will need to run ALL the numbers to see what you qualify for.
Finally, many lenders that do bridge funding will require that you use them for the first mortgage on your new purchase, effectively locking you up for two loans, not one. So you may have less flexibility with who you can work with on your mortgage.
But on the positive side, bridge funding may ultimately be the only way for some homeowners to actually get out of their existing house and into their next one, rather than just watching the market go by.
If this sounds like something that may help you, drop me a call or an email (my contact information is in the sidebar) and I will put you in direct contact with a couple of very sharp mortgage officers who know these products inside and out. Each one has different options, so there’s bound to be a plan that works for you.
Who knows? Maybe that larger home is closer to reality than you think.
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