A decade after the financial crisis and housing collapse, more consumers seem in the mood to buy a new home before they sell their existing home.
Back in the mid-2000s and before, home buyers often obtained bridge loans to give them money to buy a new home while they were waiting on their current home to sell. But with the housing implosion that started in 2007, consumers lost their willingness to own two homes at the same time and banks lost their desire to finance them anyway.
Now, bridge loans are making a bit of comeback.
At one of Ohio's largest lenders, Third Federal Savings in Cleveland, the volume of bridge loans has increased by 137 percent since last year. In fact, about 15 percent of purchase loans at Third Federal involve a bridge loan these days.
Part of what's happening is the housing market is relatively hot, particularly in middle-class neighborhoods. Buyers don't want to miss losing out on the perfect house. Sellers won't even think about accepting a buyer with a contingency that she has to sell her existing house first.
On the flip side, if a homeowner decides to sell before buying, and the home sells before a new home is purchased, then the family faces moving into temporary housing.
A bridge loan can solve that. With a bridge loan, a buyer can borrow against the value in their home. That bridge loan can be used to pay off the mortgage on their existing home, and then use what's left for a down payment on the new home. Payments on the bridge loan aren't due until the home is sold. The bridge loan generally doesn't count toward debt-to-income ratios, according to the American Bankers Association.
"You're able to use the equity in your current home before you sell it," said Meredith Weil, chief operating officer at Third Federal.
For example, if you own a home worth $225,000 and have a mortgage balance of $125,000. If you get a bridge loan for $200,000, you could pay off the existing $125,000 mortgage and have $75,000 to use as a down payment on your next home. Theoretically, you could buy a $375,000 home with a 20 percent down payment — the $75,000.
First Federal Lakewood is one of the only other major local banks that offers bridge loans. Banks such as PNC and Fifth Third don't offer them.
Dollar Bank stopped offering them about 15 years ago "because we didn't have much demand for them," said spokeswoman Lisa King.
At First Federal Lakewood, bridge loans actually took off in popularity after the financial crisis, said Mary Ann Stropkay, senior vice president of residential lending. After the housing collapse, a lot of banks weren't lending to someone who already had a mortgage, she said. "The bridge loan became a logical product."
Bridge loans are especially popular for home owners building their next home, Stropkay said. "We use it quite frequently." The bank has close 42 so far this year.
At Third Federal, the bank never stopped offering bridge loans but just hadn't seen much interest in them until recently, Weil said, because "the confidence to buy before they sell didn't exist...We're starting to see that confidence come back."
The bridge loan isn't without a hitch; the borrower is expected to sell his home and repay the loan within a year. There's a fee if the loan isn't repaid on time.
The upsides of a bridge loan: No monthly payments are required in the interim; the interest is added to the loan balance. This can be huge if a household can't afford two mortgages at the same time.
The downside: Bridge loans can be expensive.
Third Federal began actively marketing bridge loans again in May. "We are hopeful this will help people," Weil said. "It's really an option for a borrower, if they found their dream house but haven't put their house on the market."
Third Federal Chairman and CEO Marc Stefanski said many markets face low housing inventory, and borrowers often need to pull the trigger fast to get their bid accepted.
Tribune Content Agency