Planning’s a must on bridge loan

Q:My wife and I are in the beginning stages in the home search process. We currently own

a home with about $200,000 in equity in it.

Our plan is to sell our home and use most of the equity for a large down payment.

Here’s where we disagree: We need to do some work on our house before we put it on the market, which will be in about a month.

I want to start looking for the right house now, and if we find it, get a bridge loan to cover the down payment until our current house sells.

My wife thinks bridge loans are risky and that we should wait until our house is under contract before we start to seriously look for the new home.

I don’t think we should box ourselves in a time frame.

What’s your opinion of bridge loans?

A: A bridge loan is a short-term loan designed to solve your exact dilemma. Clearly, there are pros and cons to a bridge loan. Let’s take a look.

First, it enables the buyer of a new home to enter into a contract to purchase a home that’s not contingent upon the sale of the existing home. A noncontingent offer greatly strengthens your negotiating power because the deal doesn’t rely on an outside event.

Second, as you correctly state, it allows the purchaser to take his time in the home buying process.

During the housing boom in the first half of this decade, contingent offers were not ever accepted, leaving the sellers of a home scrambling to find a new home once their existing house was under contract.

The biggest disadvantage of a bridge loan is that it requires the borrower to hold a considerable amount of debt, albeit temporarily. For example, let’s say you have a mortgage on your existing home with a balance of $200,000. You purchase a new house for $600,000 and take out a mortgage of $420,000. You then take out a bridge loan in the amount of $180,000 that represents the temporary down payment.

Until you sell your house, you are on the hook for $800,000 in mortgage debt.

Since most folks would be unable to qualify to carry this debt load, many lenders will not count the bridge loan or the existing mortgage, allowing the borrower to “qualify” for the plan, at least on paper. Also, some bridge loans don’t require that any payments be made until the primary loan is paid off. The accrued interest is added to the balance.

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