- The Washington Times - Thursday, October 20, 2005

Moving to a new home is challenging and stressful, involving packing, signing paperwork and coming up with all of the required funds. For homeowners who need extra cash for a smooth transition during this time, a bridge loan could be the best strategy. It’s one solution that helps you avoid falling into the financial trap of having to pay two mortgages as you negotiate the move between two properties.

Some buyers find their dream home before offers have even been made on their current house. Or, if they have been able to sell their house, closing on the new home may be scheduled before the settlement on their existing property.

This can mean having to juggle two mortgages while coming up with the closing costs and down payment for the new property.

In the past, buyers usually listed their home first, got an offer and accepted it, then went out searching for their new home.

But in the current market, deals can happen so quickly that when buyers see the house they want, they have to act on it or risk losing it.

“People don’t want to sell until they find what they want, because they could lose out on contracts,” says Beverly Turner, loan officer with Family Lender Inc. in Fairfax. Ms. Turner says the bridge loan is an effective tool in these situations.

If you have enough equity built up in your current house, a short-term bridge loan allows you to borrow against it for a down payment to buy the new residence.

Ms. Turner says lenders can arrange for a bridge loan for up to about 80 percent of the current value of the home. When the borrowers sell their current house, they pay off the loan from the proceeds.

Once the borrowers pay off the bridge loan, they can put any of the funds remaining from the sale toward the new house. The lender can take that money and “recast” the loan as a mortgage, lowering the monthly payment, says Ms. Turner.

She says bridge loans have become very popular in the last three years as local home values have continued to escalate.

“These loans have really come into their own in the last couple years, as people want to move up, and are saying, ‘Hey, I have all of this equity built up in my house,’ but they don’t want to sell their own house first,” Ms. Turner says.

For Fairfax County resident Juanita Kosar, a bridge loan provided the peace of mind and the cash she needed. She used the money to close on her new home in Fairfax. The timing of the two transactions required her to close on her new house before she could sell her existing home in Tysons Corner.

“If you’re in a situation where you need cash immediately and you don’t have time, the bridge loan is a good option,” says Mrs. Kosar. “The only downside is that there is significantly higher interest rate and that the period for the loan is six months.”

Although there are differences between specific loans, Ms. Turner says the interest rate on the bridge loan at Family Lender is generally a fixed rate, indexed to the prime rate, plus two points, and the term is usually six months with one renewal for an additional six months.

Mrs. Kosar had the excellent credit and the home equity needed for the bridge loan, but experts warn that not all homeowners will qualify.

David Asher of American Home Mortgage, with offices in Virginia and the District, says he believes bridge loans are tough for most local homeowners to obtain. He recommends other options.

“If we were having this dialogue in a different area, there might be a greater appreciation for the bridge loan,” he says. He says the loans are not effective in this region because of the high price of local housing and the debt component.

“When you have three debt streams counted against you” — the bridge loan, the current property, and the property being purchased — “all of a sudden, the bridge loan becomes a very non-user-friendly utility,” Mr. Asher says.

Mr. Asher says he has worked with home buyers facing difficult circumstances and has found other, creative ways of handling the situation, such as short-term reduced documentation loans.

Some real estate agents say that although the bridge loan can provide a quick answer in specific situations, there are other plans of action homeowners can take.

Ron Sitrin, a Realtor with Long & Foster in the District, says the bridge loan makes sense for home buyers in panic mode who can pay for the convenience of the quick turnaround.

“In the current market, your Realtor will tell you, when you find the house you like, you need to set the train in motion,” Mr. Sitrin says. A bridge loan could be the vehicle that would allow some buyers to make that offer, he adds.

For others — home buyers who can’t qualify, for example, or who don’t want to trade extra points and fees in exchange for being able to get a loan in a hurry — Mr. Sitrin recommends using a home equity line of credit (HELOC). HELOC payments also offer an advantage, he says — the interest is tax deductible.

He points out that potential buyers need to apply for the HELOC before putting their home on the market and that this money should not be squandered.

“The appreciation in a house is an unbelievable asset in the Washington market,” he says. “You only want to spend that money on items that are going to appreciate in value.”

Other tips about the bridge loan: Homeowners who apply for it must have their home listed in the MLS and can’t sell the home themselves.

Mary Berg, spokeswoman for Wells Fargo Consumer Credit Group, also says that if the existing home falls out of escrow, they will need to get the home sold and closed prior to the end of the one-year term.

“Otherwise, they’ll need to finance the bridge loan since the balance of the account would be due and payable at the end of the term,” she says.

Despite the drawbacks, lenders and other industry insiders say the bridge loan is being used more frequently.

“We have been using them more then ever in the last three years,” says Barbara Haardt with Prosperity Mortgage in the District. “Everything has changed now, and people are being put in awkward situations.”

Ms. Haardt says another alternative is a “home-of-choice contingency,” which provides sellers of a home a 90- to 120-day period to find a new house.

Ms. Haardt says she has worked with many clients who have requested a home-of-choice (HOC) clause.

“Lots of new things are occurring,” says Ms. Haardt. “In the past year, people worried about putting their house on the market because they couldn’t find anything. The home-of-choice worked for them.”

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