Have you witnessed this scenario? A client has his or her house on the market with an offer on another home — a contingent sale. And the client needs the proceeds from current house to make a down payment on the new one. 

Of course, this is a relatively common event, especially if someone finds a dream house that they feel they have to act on quickly.

What to do? An initial answer might be to get an equity loan on the current home and use the funds as a down payment for the new one, paying off the equity loan when the old home sells. In previous markets, clients could get an equity loan on a recently listed property — paying a hefty origination charge for the privilege. This used to be a common approach but most lenders these days require that the property not be listed for at least six months before applying for an equity loan. 

But there is another solution: it’s called a “bridge” loan. Bridge loans provide short-term financing and are taken out on the newly purchased property and paid off upon the sale of the clients’ listed property. Bridge loans are second liens, placed on a first mortgage.

Suppose a buyer has a home under contract for $500,000 and originally planned to put 30 percent down for a loan amount of $350,000. The buyer could instead apply for a bridge loan for 20 percent of the sales price, and put 10 percent down on the home. The loan would then have a first mortgage of $350,000, and a second bridge loan for $100,000 with $50,000 down.

When the first home sells, the $100,000 bridge loan is paid off with proceeds from the sale. 

Requirements for bridge loans typically include: the buyer’s ability to make mortgage payments on both houses, based on their debt-to-income ratios, at least 10 percent down, and good credit.

Bridge loans aren’t for everyone. Not all buyers can afford two mortgages at the same time but if you have clients facing a similar situation, get in touch with a lender that makes bridge loans, and that just might help close the deal.

Written by David Reed, Texas-based mortgage banker with more than 20 years experience

and author of Mortgages 101 and Mortgage Confidential.

Have a question? Contact David Reed

The Housing and Economic Recovery Act of 2008, the most sweeping housing legislation since the Depression era, was passed by the U.S. Senate and House of Representatives at the end of last month and was signed into law by President Bush. The new law addresses various aspects of the housing downturn, including assistance for homeowners who are behind on their mortgages, federal oversight of Fannie Mae and Freddie Mac, and funding for cities to buy and fix up foreclosed properties. Many of the provisions of the new law go into effect October 1, 2008 but for first-time home buyers who bought, or will buy, their home between April 9th of this year and July 1, 2009, there’s an immediate bonus — a tax credit of up to 10 percent of the sales price, up to $7,500.  Note that this is a tax credit, not a tax deduction. A deduction is an item that is subtracted from your annual income before income taxes are calculated. A tax credit is subtracted from the amount of taxes you owe. 

“First-time home buyer” is specifically defined in the new law, and includes those who may have owned a home in the past, but not within the last three years.  To qualify, be prepared to show your last three years’ worth of income tax returns to prove that you did not pay mortgage interest during that period. There are also income limitations on the tax credit - $3,750 per year if you’re single and $7,500 jointly if you’re married. 

By the way, the tax credit isn’t a gift - you have to pay it back.  Nevertheless, it provides an initial reprieve, as repayment doesn’t begin until two years after purchase, and is payable over a 15 year period. If you sell the property before the tax credit has been fully repaid, any remaining amounts owed are due to the IRS upon closing.

Applying for the tax credit isn’t mandatory, but for many, it will make home ownership feasible in the coming year — and that’s exactly what the tax credit is intended to accomplish.

Fannie and Freddie in the Spotlight

While there have been concerns for months about the size of losses at Fannie Mae and Freddie Mac due to the credit crisis, the troubles at the two firms increased significantly during the week. Monday, a report from an investment bank suggested that the two firms would have to raise enormous amounts of capital to comply with revised accounting rules. Thursday, Former Fed member Poole claimed that the two firms are insolvent under standard accounting rules and warned that a government bailout might be needed in the future. Friday morning, there was speculation that the government was considering a takeover of the two firms.

The response from government officials was swift. The director of OFHEO, Fannie and Freddie’s regulator, reported that they both remained “well capitalized” based on their charters. On Thursday, Fed Chief Bernanke and Treasury Secretary Paulson attempted to reassure investors that the financial system was sound. Since Fannie and Freddie are government-sponsored enterprises, and together account for about 70% of mortgage originations and hold $5.3 trillion in home-loan debt, most investors believe that the government would step in to prevent the collapse of the firms. Friday, Treasury Secretary Paulson stated that he sees no bailout on the horizon for Fannie and Freddie and that the government is working to support them to carry out their “important mission” in their “current form”.

Bottom line, despite the negative headlines, comments from OFHEO, the Fed, and the Treasury eased investor concerns. While the stock prices of Fannie and Freddie plunged during the week, investors apparently were comfortable that the firms’ guarantees of the mortgage loans were not at risk, and mortgage rates ended the week moderately lower.

Steve Lupton

Senior Mortgage Planner

Metrocities Mortgage

Phone: 908-522-6500

Fax: 908-248-9700

slupton@metrocitiesmtg.com

Numerous closing costs come with any mortgage. There’s a fee for an appraisal and a fee for a credit report… and the lender has its fees, too. And don’t forget about the attorney fee, title insurance and escrow charges. Closing costs can vary from state to state and province to province, but you really don’t have much choice of whether you want a survey or if title insurance is right for you. There will be a variety of services performed and records searched by different companies, and none of these come free of charge.

But there is one closing cost that you can control: discount points or, more simply, points.

A discount point reduces the interest rate on your mortgage. One point is equal to 1 percent of your loan amount, so on a $200,000 loan one point equals $2,000.

Why do some lenders charge points? In reality, all lenders pretty much have the same rates; it’s just that sometimes a lender will advertise a rate with a point or a rate without a point. But the decision to pay a point is yours alone.

A point will typically reduce your interest rate by a quarter of a percent on a 30-year mortgage. If your lender offers a 6.5 percent rate with no points, then you may also get 6.25 percent with one point. So how do you decide?

It’s simple. Just take the difference in monthly savings gained with the lower rate and divide that into the point. The result equals how many months it will take to “recover” the amount

you paid in points. Let’s look at an example.

A 30-year fixed-rate mortgage of $200,000 at a 6.5 percent interest rate would mean a monthly principal and interest payment of $1,264.14. By paying an additional $2,000 in the

form of a point, your rate would drop to 6.25 percent and the resulting payment would drop to $1,231.43; saving you $32.71 each month. When you divide that $32.71 monthly savings into $2,000 you get 61.14, or about 61 months. Your recovery

period is slightly over five years. That’s a little long in my opinion and I’ve never been a big fan of paying points. Instead, I’d encourage you to take that same amount and pay down your principal.

Remember: The quarter percent difference in interest rates when paying a point is an imprecise, general mortgage rule of thumb. Whichever rate you get, be sure to divide the savings into the points paid to see how long it will take to recoup the difference.

Welcome to Jan Lexi Ollom’s Blog! This blog will provide you with valuable information, tips, and general insight into the real estate market in Summit.