What's a "trade-in" mortgage?

Housing market conditions today might be opening a window of opportunity for new types of products that give buyers an edge in a competitive environment. 

Lenders often stress the need to come up with new product strategies allowing them to better position themselves in front of clients, especially when inventory remains low and the listings on the market draw bids from multiple buyers.

At the same time, the price surge in recent years has given current homeowners a bump in equity accrual that could provide funding to help with a new purchase. 

Among potential solutions is a trade-in product that takes advantage of current home equity as a buyer looks for a new house, like one offered by Austin, Texas-based Calque.

Calque's trade-in mortgage is aimed at giving lenders and their clients the opportunity to remove buyer contingencies by fronting an estimated value of a house being sold into the new purchase. The process also keeps the buyer from holding two loans with debt levels that might not pass muster, and comes with the assurance their current home will sell.

As company founder and chairman Jeremy Foster put it, the loan should "eliminate the departing residents from the home purchase process" by removing debt-to-income underwriting standards that might otherwise call for pre-approvals and home contingencies.

The surge in housing prices since 2022 now means a substantially higher level of income is needed to in order qualify for a median priced home purchase, even before a consumer's debt is factored into underwriting, Foster said.  

Between the first quarter of 2020 and the end of last year, the median price of homes sold in the U.S. surged 27% from approximately $329,000 to $417,700, according to the Federal Reserve Bank of St. Louis.

"A lot of your borrowers are being left behind because they're having to qualify for two mortgages and they can't do it in this market anymore. So they can't compete for limited inventory," Foster remarked in a recent interview. 

"Calque really aims to help our lending partners level that playing field."

Foster founded Calque in 2020, and the company began rollout of the trade-in mortgage a year later. But a red-hot mortgage market and home-price and rate volatility created a challenging business environment for a new product to make inroads. The outlook began turning in late 2023, as seeds planted in early marketing initiatives began bearing fruit. 

Since late December, Calque announced it signed agreements with 11 new lender or broker partners across the country — more than it gained in all of 2023 — a sign companies may be looking at finding alternative financing methods to help their clients make winning bids. 

"In 2021, I couldn't get anyone to take my phone call," Foster said. "It's pretty great when you sign up the same number of lenders in a week that you were doing in a year, a couple years ago.

Among the new partners rolling out the product  this year are California-based Cornerstone First, Idaho's First Federal Bank and Apex Mortgage Group in Georgia.   

The loan hearkens back to the spate of buy-before-you sell offerings and related mortgages of a few years ago, which were aimed at helping consumers compete with all-cash bids. But the trade-in mortgage process is more "capital efficient," Foster says. 

"The challenge with most of those other models is that they're really expensive, and they're really expensive because you're having to front cash. And so, at the root of Calque's approach has been how do we build a solution that actually solves the problem where it sits, which is in the debt-to-income underwriting standards — and does it in a way that's compliant," Foster said. 

Calque offers its products exclusively through lender partners at no charge as an optional service for their clients. Per-transaction fees are paid by the consumers who use the service.

"We will never compete with our lenders for a loan. It is their mortgage," according to Foster.

Along with the benefit of being able to buy before selling, the program also adds some of the characteristics found in the growing number of home equity solution providers that allow owners to tap into the growth in value of their properties. At the end of 2023, Corelogic estimated U.S. homeowners gained an average $24,000 in equity over the prior year, with the nationwide increase totaling approximately $1.3 trillion. 

New home buyers also receive assurances that their current home will sell. And with some partners, the option of drawing from home equity with another lien to help fund a down payment is also possible as well. 

"We're making a guaranteed offer. If we have to buy the home, we will. That is a key compliance perspective, and a big focus for Calque."  

While some of the products and marketing initiatives lenders unveiled in the past year have focused on reduced borrower costs or interest rates, Calque hopes its service might represent a new alternative model of home lending for the future.  

"At the pace things are going, I really think that it's not going to be real long before everybody understands that this is the way a pretty significant chunk of mortgages need to be done," Foster said.