It’s a sign of the times when America’s largest lender, Rocket Mortgage, starts offering bridge financing, a somewhat complicated niche loan product.
Why now? Well, the housing market is on ice with many owners reluctant to leave their homes. Why would anybody want to move now and double their interest rates? Or watch their property taxes soar with a change of address?
But for those who must move and are looking for help in between a sale and a purchase, a bridge loan might be for you.
So, what is a bridge loan?
Also known as a swing loan, a bridge loan is a short-term financing instrument allowing a home seller to tap their home equity before the home is sold. Those tapped-out funds are used as a down payment on the replacement property. It’s a short-term solution that bridges a liquidity gap, facilitating the purchase of the replacement home before the departing residence is sold.
Whether the homeowners are stepping up in price or stepping down, most are anxious and uncertain about being able to find the right replacement property before selling their departing residence.
This is a way to avoid asking the seller for the contingency of waiting for the departing residence to sell. This solution avoids double-moves (sell, short-term rental, buy). It’s also a great way to compete with cash buyers and an array of non-contingent buyers.
Rocket’s bridge loan — available only directly to customers and not through mortgage brokers like me — gives clients up to six months to sell their home, with interest-only payments throughout that period. To qualify, clients must have their home listed, be under contract with a listing agent or have a guaranteed buyout agreement in place. The client must have an associated Rocket Mortgage purchase loan to be eligible, according to its June 24 press release.
Now, let’s get to the other issues: costs, points, interest rate, risk, qualifying and the like.
Rocket did not respond to requests for comment.
Other lenders typically require the bridge loan against your departing residence to be in first lien position. What that means is if you have a current mortgage or mortgages against your property, those would be required to be refinanced into the bridge loan. For example, let’s say you are pulling out $500,000 for the replacement residence down payment. And you also currently owe $300,000. That means you’ll be paying points and settlement charges on $800,000, not $500,000.
Obviously, there are expenses to refinancing into a bridge loan in respect to your departing residence. Generally, it’s 1 to 3 points (each point is 1% of the loan balance so 2 points on a $500,000 loan would be $10,000). The interest rate is in the 9% range.
You will also be charged an origination fee for the mortgage on the replacement property, roughly 1 to 2 points. This is just like any other purchase mortgage, except the interest rate is likely to be higher than typical rates on the take-out mortgage. Say you can get 6.25% on a regular mortgage. Attached to the bridge loan the interest rate could be 7.25% or 8.25%. The rate depends on your lowest middle FICO score and your down payment percentage (in industry parlance this is called loan-to-value).
You’ll need at least 25% remaining equity in your departing residence after you pay off existing liens, pull the cash out and pay closing costs. For example, say your home is worth $1 million and you have an existing mortgage of $300,000. You want to pull out $435,000. Closing costs are $15,000. You would have $250,000 of remaining equity, which meets the loan-to-value requirements.
On the replacement purchase side, you will need to put at least 20% down. These are Rocket’s terms, by the way.
The risk you are inheriting in a bridge loan is its temporary financing. The term of a bridge loan is six to 12 months. That means you have a balloon payment due at the end of the timeline, whether you’ve sold your departing residence or not. If you don’t cough up the funds, you could be facing foreclosure.
The key to making all of this work is properly pricing your departing residence. If you have a fairly priced, clean property, you are not going to have a problem selling it with those timeline constraints.
Qualifying is another issue. Remember, lenders will hit you for the interest-only payment, taxes, insurance and any association fee on the departing residence, in addition to the total house payment on your replacement property.
Lendsure, a so-called non-QM (qualified mortgage), offers a one-year bridge loan with no payments on the soon-to-be departing residence. The interest rate still accrues but without monthly payments, making it easier to qualify. The accruing interest is owed when the bridge loan is paid off.
In the past three years, most of the sellers in my experience have been moving because of a death, divorce or job transfers. Now, I am seeing more folks who are choosing to sell who just want to get on with their life, regardless of their low mortgage rate and low property taxes. A bridge loan is a good but expensive way to get you into the place you really want.
Full disclosure: My firm does business with Rocket Mortgage and Lendsure.
Freddie Mac rate news
The 30-year fixed rate averaged 6.67%, 10 basis points lower than last week. The 15-year fixed rate averaged 5.8%, 9 basis points lower than last week.
The Mortgage Bankers Association reported a 2.7% mortgage application increase compared to one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $150 more than this week’s payment of $5,189.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75%, a 15-year conventional at 5.375%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.875% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.625% and a jumbo 30-year fixed at 6.5%.
Eye-catcher loan program of the week: A 40-year fixed rate mortgage, interest-only for the first 10 years at 6.625% with 1 point.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].
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