- The Washington Times - Thursday, June 24, 2010

QWe are in the process of buying our second home. Our plan is to find our next home, buy it, move in, fix up our existing home and put it on the market. This will give us plenty of time to do what it takes to get the best price for our current house.

Three lenders have said we cannot qualify unless we sell our home first. Our real estate agent says any offer we make can’t be contingent upon the sale of our home. This means we have to sell our home while we’re still living in it, before we find our new home.

I was under the impression that we could get a bridge loan for the down payment on our second home and buy it before selling our current house. Any suggestions?

A. First, your real estate agent is wrong. You absolutely can make an offer on a home contingent upon the sale of your current house. It may not be accepted, but you can do it.

A lot has changed in the mortgage industry over the past three years. The idiotic policies of pushing high-interest loans to folks with questionable credit has been replaced with the idiotic policies of turning down perfectly qualified applicants for idiotic reasons.

I think your situation, however, falls somewhere in the middle.

Back in the “easy-mortgage-money days,” your lender would cite the so-called temporary debt-to-income ratio to make this happen. Moreover, bridge loans were easy to obtain. For those who are unfamiliar, let me explain.

“Temporary DTI” is a term used by lenders that expresses a borrower’s debt-to-income ratio that is expected to be short-lived. Your situation is a perfect example. You wish to buy a home free from any clauses that will force you to sell your existing home first. This would give you the freedom to make an offer and negotiate from a position of strength.

This position, from a lender’s standpoint, likely would make your loan papers look ugly. You are applying for a new mortgage loan to buy a new home. You’re also borrowing the down payment through a bridge loan. And you are still on the hook to pay the mortgage on your existing home.

On paper, your monthly legal obligations at the time of settlement would far exceed the standards of traditional underwriting guidelines. The lender, however, sees that your existing house is for sale and therefore ignores your debt-to-income ratio because it is assumed to be temporary. As soon as you sell your house, your old mortgage goes away, you cash in your equity, and you pay off the bridge loan.

Times have changed, folks. Though bridge loans still are available, I am unaware of any lender who will ignore the temporary DTI. In other words, your verifiable income must be high enough to meet the maximum allowable ratios while counting all your debts at the time of settlement, even if they are likely to be temporary.

Back in the day when property values were skyrocketing and the housing market was red-hot, lenders didn’t worry about the temporary DTI because it was, indeed, temporary.

Today, with falling property values and sluggish home sales, lenders aren’t quite sure. What if you can’t sell your house? Is your income sufficient to handle the payments on the new mortgage, the old mortgage and the bridge loan indefinitely? Do you have enough money in the bank to carry these debts in case you can’t sell your house? Expect lenders to be strict on this.

Many real estate agents will encourage you to make an offer that’s not contingent upon the sale of your house. While that will strengthen your negotiating position and create a sale (and a commission) for the real estate agent, it could leave you hanging with an awful lot of debt over your head that you can’t quickly eliminate. Lenders are afraid of exactly that.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to [email protected].

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