Removing contingencies on purchases

It used to be that the mortgage contingency or financing date was one of the most important parts of the purchase and sales contract. This is the date when all conditions have been met, in a satisfactory manner to the investor, and is generally the last hurdle to be cleared before the closing date.

But with the increases in residential house values and the subsequent increase in home owners “net equity”, there is a new dilemma involved in buying and selling a home simultaneously. Obviously using the net equity from the sale of the current home to purchase the new primary residence is the ultimate goal, but all too often these days we are seeing contingency clauses in contracts, making the sale or purchase reliant upon another purchase or sale – and us reliant upon the abilities of another agent.

There are two solutions which allow the purchase to take place without the contingency on the sale of the current home. The first is a bridge loan, the second are transition loans.

A bridge loan lets you borrow a portion of the current home’s equity, and use it to purchase the new residence. These loans require excellent FICO scores (typically 720 ) and a good equity position. They allow the borrower to borrow up to 80% of the appraised value. From these funds the investor pays off all current mortgages, collects 6 months of interest payments and then pays the costs of the loan. The remaining funds are available for use towards the new purchase. Because the mortgages are paid off and six months of payments have been taken, the borrower has no payments on the loan for the next 6 months. If the house sells before 6 months are up the borrower is refunded the unused pre-paid interest. If the loan stays in place after 6 months the borrower makes interest-only payments through months 7 to 12. After 12 months the bridge loan needs to be refinanced in to a longer term mortgage as an investment property.

Bottom line – the bridge loan is a segue loan, for up to 12 months, designed for borrowers with great credit and a great equity position, to utilize the proceeds to purchase a new primary residence.

Transition loans are geared towards borrowers who do not have the equity position or the credit scores to qualify for a bridge loan, and they enable the borrower to purchase the new primary residence without having to sell the current home. These loans typically require FICO scores of 620 or better, and make use of several of the low/no documentation programs that are available. They allow the purchase of the new home without it being contingent upon the sale of the current home; with minimal income and asset documentation. These programs can finance 100% of the purchase, which is key, and the loan is typically paid down and refinanced once the old primary residence sells.

Additionally, some borrowers are taking advantage of programs that allow up to 100% refinancing of their current home, as soon as it is off the market. By taking the property off the market and doing this type of refinance, the borrower can access funds to put down against the new property using one of the low/no documentation loans – securing a better rate and removing the need to refinance immediately upon the sale of the old home.

As you can see, while they may take different paths, both options carry the same vision of eliminating the need to have the purchase and sales contract contingent upon the sale of the current home.

These are short term loans, with long range results, and give the Real Estate industry a positive solution to an ongoing challenge.

For more information email gmorfill@ftmc.net