AMI Lenders Inc. (a Houston based hard money lender for over 25 years) has successfully financed many homes known as “bridge loans”.
It’s a unique way to close faster than it takes to close into a traditional loan and many times, it’s the only way some borrowers can qualify for a home loan.
Prior to 2008, just about anyone could qualify for a home loan. Those loans were known in the mortgage industry as “liar loans”. If a borrower needed an extra $1,000.00 a month in income to qualify for a mortgage loan, the borrower simply added an extra $1,000.00 a month to his/her loan application. The mortgage company’s loan processor did not verify the borrower’s income. The mortgage company simply took the borrower’s word for their annual income.
In 2008 the sub-prime lending market crashed—and a majority of the hard money lenders and mortgage investor’s corporations including many banks lost billions of dollars and the industry as a whole lost trillions.
After the financial crisis of 2008, federal and state legislators passed a raft of new legislation designed to protect borrowers from obtaining loans that were beyond their ability to repay.
The 2008 crisis led to the failure of a large number of banks in the United States. The FDIC closed 465 failed banks following the crash. Lehman Brothers went bankrupt. Merrill Lynch, AIG, Freddie Mac, Fannie Mae, and many others were on the brink of failure.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank) was signed into federal law by President Barack Obama on July 21, 2010.
Pursuant to the Dodd-Frank Act, any lender that finances the purchase of one’s primary homestead must have third-party proof of the borrower’s income and the lender must prove that the borrower has the “ability to repay”.
This requirement has made it impossible for thousands (if not millions) of prospective borrowers to qualify for a home loan.
The Dodd Frank Act, however, allows a borrower to finance a home without having third party proof of their ability to repay if the borrower can prove that they have the ability to pay off their mortgage loan from other sources of income.
Repayment strategies can include selling the home that is being financed, paying off the loan with proceeds from another transaction, or refinancing the bridge loan into a conventional mortgage.
Bridge loans are ideal loans for residential hard money lenders and for their borrower.
Following are illustrations of bridge-loans from AMI Lenders Inc.:
- Our prospective borrower owned her present home free and clear but fell in love with another home that what was for sale at a very good price. The home she wanted to buy cost $500,000.00 but she could not prove her “ability to repay”. However, she could pay $150,000.00 as a cash down payment and her present home was owned free and clear. It was worth $400,000.00. We financed $350,000.00 for the purchase of the new home with 12 monthly payments of interest only. Since she had the ability to pay off her loan with AMI when the home she vacated sold, she qualified for financing. By the way, a few months later, she sold the home and paid off her loan with AMI;
- Our prospective borrower was leasing a beautiful home with an option to buy the home for $1,100,000.00 but the option period was about to expire. He and his wife could not prove their ability to repay our loan. However, he was the beneficiary of a large trust and the annual payment was large enough to pay off his loan to us. We financed $770,000.00 and his trust fund was larger than the amount he owed us;
- A few days ago, we approved a loan where the scenario was similar to my first example. They owned their home free and clear and while they could not qualify under the “ability to repay” legislation, they did qualify for a bridge-loan.
There are other types of bridge-loans. The borrower’s present home does not have to be owned free and clear. If the equity in their present home is large enough, that too will work. E.g., say their present home is worth $600K but they only owe $150K. A hard money lender could finance the new home and take a junior lien on the home they’re vacating. When the home they vacated sells, they could reduce the balance on the new home and then refinance the smaller loan with a traditional lender.
There are occasions when a mortgage investor’s corporation or a residential hard money lender is a better choice for a borrower. A hard money lender can close a bridge-loan is just a few days. A bank or a traditional mortgage company often takes weeks. Therefore, it’s possible that if the seller knows their buyer can close fast, they’re willing to reduce the price of their home.
The best source of financing a home with a bridge loan is with a residential hard money lender).
AMI Lenders Inc. is a family owned business and we’ve been offering an alternative source of financing for over 25 years. Call me (Jim Emerson) or one of my sons (Jeff or Joe) if you have questions. Our goal is to make loans but we love helping people understand the complex laws that govern home loans. And for that we do not charge.