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Quest for a Short-Term Loan

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Posted On: 03/02/2016

Question:

We need a temporary loan to move from the house we’ve got to the house we want. We have a limited amount of equity. Which would be better for us, a reverse mortgage or a bridge loan?

Answer:

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If you do not have significant equity in your home, it may be that neither option is available to you. Moreover, there are lower-cost choices to consider.

Under the federal Ability-to-Repay requirement (ATR), lenders must verify a borrower’s ability to repay the debt. This rule applies to virtually all mortgage financing with two big exceptions: reverse mortgages and bridge loans.

Reverse mortgages are excluded because they’re a form of asset-based financing. A reverse mortgage is a loan for homeowners 62 and up that allows them to convert part of the equity in their homes to cash. Generally, your income does not count, although that has begun to change. What’s important is your age and the equity in your home. The more equity the better.

Check how much you might be available to you at the National Reverse Mortgage Lenders website. Search “reverse mortgage calculator” at reversemortgage.org.

The calculator estimates the size of your possible reverse mortgage and shows the fees you would pay. You will see that a reverse mortgage for a short-term loan of a few months is unlikely to be a good option because of the up-front fees.

A bridge loan is secured by your current home, so you need equity to obtain such financing. To avoid the Ability-to-Repay rule, a bridge loan can last no more than 12 months, although a renewal or bridge loan from another source may be possible. Lenders will want to see excellent credit just in case you wind up buying a replacement home but are unable to sell the first property.

Here’s how lenders might calculate a bridge loan. The property is worth $300,000. The lender requires that you have 20 percent equity. For a $300,000 property, the maximum amount of allowable debt is $240,000. Now imagine that you have a $200,000 mortgage balance. Subtract $200,000 from $240,000 and the result is $40,000 – the amount a lender might make available to you in the form of a bridge loan.

How much will a bridge loan cost? Ask about the interest rate, up-front costs including points, origination fees and prepayment penalties. Ask about required monthly payments. Be aware of risks. What happens if your home does not sell in 12 months?

Is there an alternative? If you have a home equity line of credit in place before the home is listed you might be able to borrow against that to buy a replacement property. A personal loan could be an option.

As always, be sure to shop around and compare terms.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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