Bridge Loan
Bridge loans are temporary loans that bridge the gap between the sales price of a new home and a home buyer's new mortgage, in the event the buyer's home has not yet sold. The bridge loan is secured to the buyer's existing home. The funds from the bridge loan are then used as a down payment on the move-up home.
Some lenders who make conforming loans exclude the bridge loan payment for qualifying purposes. This means the borrower is qualified to buy the move-up home by adding together the existing loan payment, if any, on the buyer's existing home to the new mortgage payment of the move-up home. The reasons many lenders qualify the buyer on two payments are because:
•Most buyers have an existing first mortgage on a present home.
•The buyer will likely close the move-up home purchase before selling an existing residence.
•For a short-term period, the buyer will own two homes.
If the new home mortgage is a conforming loan, lenders have more leeway to accept a higher debt-to-income ratio by running the mortgage loan through an automated underwriting program. If the new home mortgage is a jumbo loan, most lenders will restrict the home buyer to a 50% debt-to-income ratio.
Benefits of Bridge Loans
•The buyer can immediately put a home on the market without restrictions.
•Bridge loans may not require monthly payments for a few months.
•If the buyer has made a contingent offer to buy and the seller issues a Notice to Perform, the buyer can remove the contingency to sell and still move forward with the purchase.
Home Buying Drawbacks of Bridge Loans
•Bridge loans cost more than home equity loans.
•Buyers will be qualified by the lender to own two homes and many will not meet this requirement.
•Making two mortgage payments, plus accruing interest on a bridge loan, could cause stress.
Balloon Loans
A balloon payment occurs when a loan is not amortized. It is generally an early due date, involving the payoff of an existing loan balance. Interest-only loans, also known as straight notes, generally contain a balloon payment provision.
Also Known As: lump sum payment
Examples: A $150,000 loan may be amortized for 30 years, but due and payable in five years. This means the buyer will make amortized payments, based on a 30-year payment plan, but the loan balance will be due in five years instead of 30, resulting in a balloon payment.
Because the biggest portion of a principal and interest payment in the early years of an amortized loan is interest, a five-year balloon payment will be close to the original unpaid balance. If only interest-only payments are paid, the original unpaid balance will be the balance due at the end of the loan term.
Combo Loans
Combo or piggyback loans are financing that combines a first mortgage with a second mortgage (with or without a down payment). The reasons these types of loans are appealing are because many home buyers do not have 20% of the purchase price in cash or do not want to put down 20% to buy a home -- and combo loans sidestep the requirement to pay PMI. Common types of combo loans are:
•5/15/80. This scenario involves putting down 5%, and financing a first mortgage of 80% of the purchase price, coupled with a second mortgage comprising 15% of the purchase price.
•10/10/80. This scenario involves putting down 10%, and financing a first mortgage of 80% of the purchase price, coupled with a second mortgage comprising 10% of the purchase price.
•80/20. This scenario involves putting down zero, and financing a first mortgage of 80% of the purchase price, coupled with a second mortgage comprising 20% of the purchase price.
The interest rates on a second mortgage are higher than those on a first mortgage, but sometimes the total payments are less than those financed on a first mortgage with private mortgage insurance. Moreover, since combo loans reached a peak in 2005, many borrowers are considering other options because of short-term interest rate fluctuations.
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