How To Avoid The Most Common Bridge Funding Mistakes

11/29/2021

Bridge funds are an excellent option for those purchasers who need flexibility in a super-competitive real estate market. With bridge funds, you can rely on the equity in your existing home to close your purchase earlier. Additionally, if you haven't sold your property yet, knowing you can obtain bridge funds will enable you to create better offers, which go a long way in a world of multiple bid scenarios.

One aspect of bridge funds that doesn't often get discussed is what could go wrong. Sure, the concept of obtaining a temporary loan to close on a purchase sounds lovely, but it helps to know the risks as well.

First, you cannot obtain bridge funds unless your sale is firm, meaning there must be zero conditions outstanding like financing or an inspection, for example. Some lenders will also require that the bridge loan be registered on the new property purchased and the existing property sold.

When The Sale Doesn't Close

In rare situations, a sale property may not close after all, even if the agreement to purchase is firm. Some people forget that a purchaser must follow through on their commitment to purchase, and if for some reason that doesn't happen, you may get stuck with both the bridge loan AND the new mortgage loan.

This conundrum would require a refinance of the mortgage on the existing property or even the new property to consolidate the bridge loan into a conventional mortgage if the property does not sell again within a reasonable time frame.

Remember that bridge loans are short-term loans, so eventually, they will expire, and you will need to figure out alternative options if you can't resell.

One way to help mitigate the risks of this happening is to ensure the person that bought your property is pre-approved for mortgage financing when they submit their offer. Most transactions that fall apart in real estate are often due to the purchaser's failure to obtain adequate funding.

Secondly, consider whether the person buying your house needs to sell to buy regardless of whether or not they put this in the offer. If they have a home to sell––even if they go in "firm"–– this can pose a problem if the market turns or they don't sell, or if they don't sell for what they want.

The best course of action is to speak to a real estate agent and determine ways to mitigate your risks of bridge funds going sideways.