What
is a bridge loan?
A
loan that provides bridge or temporary financing for a customer, usually as
in the scenario presented above. The "bridge" is to provide 100%
financing temporarily until the old home is sold and the loan will then be
paid down to an agreed-upon loan to value based solely on the new residence.
So
what’s the problem?
The
problem is getting a valid lien on the old home without doing a home equity
loan. Lenders want to keep it simple by doing one loan with a lien on each
home. Additionally, a home equity loan can not exceed 80% of the fair market
value of the homestead, nor can it be cross-defaulted or cross-pledged with
another loan.
Why
is the old home considered the homestead if the customer intends to move to
the new home when the loan is closed?
Under
Texas law, an existing property is deemed a homestead until (i) the property
is abandoned as the homestead and, (ii) there is an intention to abandon.
To meet the first requirement, there must be physical acts of abandonment.
So technically, the old house is still the homestead until abandoned as such
by the owner/borrower.
What
acts of abandonment qualify?
It
depends on the title company. Some require physical removal of all personal
property, some require the moving trucks to be on site. Some require only
that the house be listed for sale. Consult the title company for its requirements
before approving the loan.
Should
a Lender require title insurance on the lien on the old home?
It
is recommended, as a real question of lien validity exists, since a lien other
than a home equity lien would be invalid if the homestead has not been abandoned
under the legal definition. Under Texas law it would be a deceptive trade
practice for a lender to refuse to release a lien that it know or should have
known was invalid.
Are
there any special disclosure issues?
Some
lenders have taken the position that a three day notice to cancel is required
under the Reg Z, the federal truth-in-lending regulations. The Reg Z Commentary
at 23(a)(1)4 states:
"Special
rule for principal dwelling. Notwithstanding the general rule that consumers
may have only the principal dwelling, when the consumer is acquiring or constructing
a new principal dwelling, any loan subject to Regulation Z and secured by
the equity in the consumer’s current principal dwelling (for example,
a bridge loan) is subject to the right of rescission regardless of the purpose
of that loan. For example, if a consumer whose principal dwelling is currently
A builds B, to be occupied by the consumer upon completion of construction,
a construction loan to finance B and secured by A is subject to the right
of rescission. A loan secured by both A and B is, likewise, rescindable."
But
a close reading of the commentary provision shows that the example of a bridge
loan given is not the way lenders in Texas structure bridge loans, and thus,
should not apply. Consult your attorney or compliance officer on this issue.
Is
there any other way to structure a bridge loan?
Some
lenders will take an assignment of net proceeds of the sale of the old home
in lieu of a deed of trust lien. One problem with this is for the lender to
track a sale; another problem is that the old house may not be sold in a timely
manner. Also, proceeds of the sale of a homestead are exempt for a six month
period. So if the homeowner claims the old house was the homestead at the
time of assignment, the assignment would be invalid against the proceeds for
at least the six month period.