The financial crisis and subsequent fallout from the recent meltdown in the mortgage industry appears to be far reaching beyond what is being reported. In the past, bridge loans were not typically connected in any way to the subprime industry. In fact, they have very little in common; most of the bridge loans made over that last ten years were portfolio loan products offered by commercial banks. But now a bridge loan would be harder to find than a good old subprime loan. I find that strange because it was the latter that started this mess. And banks don't usually make bridge loans to anyone but the best of borrowers, so is it me or is that crazy?
A bridge loan is a type of mortgage used by buyers to purchase a home before selling their existing home. They are a strange loan product that uses more than one piece of real estate as collateral. In many cases they do not follow standard underwriting guidelines because the bank is lending its own money and not selling the loan, he that has the gold makes the rules. The loan is placed on both properties, the one they already own and the one they are buying, until the old home sells. When the old home sells they pay off every thing except the new first mortgage on the new home.
Good grief, no wonder you don't see them often. Who could keep all of that straight? Recently, an out of state buyer found me by looking at homes on my web site. They were relocating to Louisville from Denver and wanted my help finding a home. We found one they loved and they gave me a copy of their loan approval from a broker back home in Denver. Unfortunately, the buyer purchasing their existing home was rejected for financing after several weeks of being told it was a done deal.
Of course I called my local mortgage guru and laid out the scenario. His response was that I could kiss that deal good bye if I was asking him to arrange a bridge loan. Which is exactly what I was about to ask him to do for me. He informed me he was having trouble getting vanilla envelopes approved, that's what he calls loans without problems. Just between you and me, mortgage people are a little whacko. But my guy knows his stuff.
My clients wanted to buy a home owned by a builder, so my mortgage guy suggested that I cut out the banks entirely. He said I should ask the builder if he would carry back a loan for most of the purchase price. I must have practiced what I was going to say at least a dozen times before actually making the call. The rehearsal wasn't necessary. It seems the builder wanted to sell the home as much as they wanted to buy it.
This story is strange on many levels. This buyer was more than credit worthy, but the banks wouldn't even consider his request. He was at the opposite side of the credit spectrum from a typical subprime borrower and yet the mess caused by that melt down is choking the entire industry. Owner financing is a very old tool but I guess it isn't dead.
