Passage From Deed to Deed: Rocket Mortgage® Now Offers Bridge Loans

Need to sell your home? Homes aren’t selling as quickly as they used to. But a bridge loan might provide some help with your buying-while-you-sell experience.

This is the message from Rocket Mortgage®, which will now let you buy your next house now — before you transfer the deed to your current home. Let’s take a brief look at Rocket Mortgage and its bridge loan. But first…

What Is a Bridge Loan?

Bridge loans are short-term loans (six months or a year). A bridge loan could be approved quickly—in some cases, just one day. It could take two weeks for the customer to receive the sum.

The borrower pays interest only. The funds are drawn from a seller’s current home (or even the seller’s next home) to finance the gap from the current home mortgage to the next home’s mortgage.

So, if you get a bridge loan — some call it interim financing or a gap mortgage — you’re tapping home equity to fund the home you want to buy. This way you’re not forced to sell before you can get into your new living space.

And this way, you don’t need to spend money and time moving twice — taking all your stuff out of your current home, and then moving it again out of a rental home or a storage unit.

A bridge from home to home puts your equity to work exactly where you need it. And you can move while your current home is readied to sell.

This measure of convenience will cost you, of course. Bridge loans have hefty closing fees, generally somewhere from 1.5% to 3% of what’s borrowed. They tend to come with higher interest rates than regular mortgages. And the rates are variable. Obviously, there’s a big payment due at the end of the term. These loan products can bring new money challenges into the picture.

In any case, the term bridge means these loans connect a home’s seller from that current home’s mortgage to their next home’s mortgage. Many people might not know much about them. They tend to be issued by credit unions and small or regional banks. Their workings could be intriguing to many, especially now that Rocket Mortgage is offering these products as options for their mortgage customers. But before we get to that…

Who Is a Bridge Loan Right For?

The person who really needs this is one who can’t sell the current house, but desperately needs to, because they want to sign up for a new mortgage. This person can’t cover both mortgages at once, waiting indefinitely for the current home to sell. In short, they really need to tap some of the value in their current home to come up with closing costs or make the down payment on the next one.  

But a lender is only interested in accepting applications from those who meet its criteria. There’s the rub. Eligibility standards are higher because this is considered a riskier loan than a regular mortgage. (For example, applicants need to show a debt-to-income ratio of no more than 45% for Rocket’s bridge loan.)

In many cases, sellers who can’t seem to sell decide to lower their asking prices.

But say the home does sell within six months. Then, at least there is typically no penalty for prepayment for a seller who pays off a bridge loan ahead of its due date.

OK, with all of that bridge loan background now laid out, let’s talk about what Rocket’s offering here.

How Would a Rocket Mortgage Bridge Loan Work?

If you get a Rocket Mortgage purchase loan, you could be eligible for one of the company’s new bridge loans. And if you do apply for a Rocket Mortgage bridge loan, you’ll list your home for sale. With the loan approved you’ll make interest-only payments until you sell your home and are ready to pay off the bridge loan.

You can use the funds for a down payment or closing costs on your purchase. You’re able to buy your next home without making your offer contingent on selling your current one.

Asking less of your seller may make your offer more appealing.

Bill Banfield, chief business officer at Rocket Companies, told Yahoo Finance in an interview that a Rocket Mortgage bridge loan can go up to 80% of the value of the seller’s current home. The term for repayment is six months.

This tool can give you strength as a seller, by allowing you some time to obtain a good offer on your old place.  

What If My Current Home Won’t Sell Within 6 Months?

Uh oh. You’d better hurry up and sell, because in six months, you need to get through closing and be ready to pay back this bridge loan in full. Trouble is, in this market, finding a committed buyer can take time.

Rocket Mortgage leadership knows its bridge loan rollout comes at a time when homes are staying on the market a while. Bill Banfield suggests that a seller might consider setting up the “guaranteed buyout” option. If your home won’t sell on the market, Rocket will sell it to an iBuyer, says Banfield — Opendoor or Offerpad.

Will that mean having to take a lowball offer? It could. At least you’ll know what your “exit price” could be if you need to get out of the home but it isn’t selling within those first six months.

Selling your home while buying another? It’s a common situation. You might have several choices if buying your next home hinges on selling your current home.

What Kinds of Buyers Use Bridge Loans?

A person who is selling one primary residence to buy a new primary residence can use these. People who are downsizing or upsizing use bridge loans.

To make the numbers work, these are buyers who have built up substantial equity in the home they’re selling first. Some own homes without mortgages. In any case, they’re advancing some of their accumulated equity into their next home.

Some are parents moving to live near younger generations. Some want to be cash buyers, and can get ample sums out of their current homes.

People who get bridge loans generally have solid credit profiles, with “very good” or “exceptional” FICO® scores.

No Matter How You Move From Deed to Deed…

Home sales and purchases take skill, and this column can only give you a general idea. Consider hiring a real estate pro who has the fiduciary duty to represent you. Professional guidance can keep you steady as you make the change. And never underestimate the value of an experienced mortgage specialist. These are the people with the knowledge, resources, and honed abilities to help you ask the right questions.