New Tools For Changing Markets: An Innovative Approach To Bridge Loans–Jeremy Foster from Calque
Jeremy Foster is Founder and CEO of Calque, Austin, Texas
As good as traditional bridge loans have historically been for some borrowers, markets evolve and there is a reason history lives in the past. Homeowners with enough cash or income have historically avoided the headache of moving out of their house before they buy their next one with traditional bridge loans to ‘bridge’ from one house to the other.
Over the last few years, the housing market has become increasingly crowded and competitive. Prospective retail buyers are competing with other equally motivated consumers in their economic bracket and new, cash-rich power buyers and investors like Arrived. This has depleted housing inventory and driven prices up. The result is that many borrowers who would have previously qualified for bridge loans may find themselves unable to do so in an elevated home price and interest rate environment.
It is important to note that most homeowners want the ‘buy before you sell’ experience that bridge loans enable. Still, traditional bridge loans are financially out of reach for a majority of borrowers. For example, 56% of homeowners need proceeds from selling their current home to afford their next house. A smaller portion has enough cash on hand to purchase the next home but can’t qualify for three loans at once (i.e., the original mortgage, the new mortgage, and the bridge loan).
In 2023, more than one-third of all accepted offers used non-contingent financing, which appears to be the new normal for the housing market. The result is that purchasing a new home has become even more stressful, especially for borrowers who would have previously qualified for the ‘stress-free’ bridge loan experience. While some are turning to contingent financing, they are in a far weaker position than cash buyers and investors and often have to pay more to win the home. Alternatively, these potential buyers are presented with what feels like an entirely unreasonable lifestyle choice–selling their house, moving out of their home into a short-term rental, and then buying their new home. And, in a competitive housing market, all that emotional and financial stress can be enough to keep them from buying.
Individual Pain Also Causes Market Woes
This has repercussions not just for individuals but for the market as a whole. If current homeowners give up on upgrading their homes and stay put, they won’t list their previous home on the market, which stymies a major source of housing inventory for first-time buyers.
This stagnation is bad for the market and for the people who make up that market. The median age of homebuyers has increased from 31 in 1981 to 49 in 2023, indicating that younger generations can’t afford homeownership and all the economic and familial benefits it brings. It’s a market inefficiency with an actual human cost. We need to find new solutions to help move the market forward and level the playing field for retail buyers.
PropTech Has Created Competing Lending Solutions
Over the past decade, PropTech companies have rolled out ‘cash offer’ and ‘buy before you sell’ products that help home buyers compete while avoiding bridge loans and the common downsides associated with them; however, some of these products cause as many issues as they fix.
To make the transaction work, these companies usually replace the agent, the loan officer, or both with a centralized platform. While these products help solve the convenience and DTI issues, the process can be expensive for buyers (sometimes more expensive than a bridge loan would have been if the buyer had been able to qualify) and disintermediates local real estate agents and loan officers who know the area and can help buyers make financially sound decisions.
Where Do We Go From Here?
We need new tools to help narrow these gaps; some are just around the corner.
For example, Calque has pioneered a new, innovative business model as a better ‘buy before you sell’ solution that ensures that the buyers who should qualify do qualify, for an affordable fee. The most recent market innovation comes in the form of a binding backup contract that removes compliance and risk barriers so established lenders can offer a bridge-like experience with fewer risks for their borrowers.
Calque provides a Purchase Price Guarantee for homebuyers (i.e., a binding backup contract on their home), which enables lenders to free up borrowers’ equity and remove their previous mortgage as well as a second mortgage from debt-to-income considerations. A binding backup offer empowers loan officers to write non-contingent financing that can compete with all-cash bids. And best of all, since consumers can sell their first home for more than their Purchase Price Guarantee (and keep those profits), Calque can help them minimize risk while maximizing their equity and flexibility.
As the housing market evolves, it’s incumbent that technology and lending practices move along with it; loan officers and real estate agents want what is best for their clients, and this solution is the beginning of a new wave of products that give them the tools to do so.
(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)
