City of Bridge…Financing – Why a Bridge Loan may be Important to your House Deal

bridge

Lawyers like helping you buy houses. Those who practice in the area will do their best to get it to you on time, and as quoted, and done in accordance with their professional obligations.

It’s true. Promise. 
However, one of those items that I occasionally get strange push back on is the requirement for bridge financing to close your real estate transaction.  Those pushing back (whether it is clients, Realtors, or Mortgage Professionals) seem to think that I just like to make their life a little more difficult.  But that couldn’t be further from the truth – this is to simplify the client’s life during the stressful day of possession.   I don’t want them worrying about whether we are going to be receiving the money from their sale transaction on the same day that they are trying to move into their new home.

Inspired by a recent Facebook and Twitter commentary by Brad Jamieson, a colleague up in Saskatoon, I thought that a little more education on the point would help.   Here is a little FAQ on why bridge financing is necessary:

“(1) What is Bridge Financing?”

Bridge financing is short-term financing that helps purchasers to “bridge” the gap between old and new mortgages by allowing them to tap the equity in their current residence as a down payment.

Usually, this financing is provided by their lender on the clients’ new home purchase.  The lender will usually require some additional documents to be signed, like a demand note and an assignment of proceeds on their sale.  They will lend based on the amount of equity available after closing and commissions, and usually only after a firm sale is in place on the existing property owned by the client.  There may be an application fee, and higher than mortgage lending interest rate for the short term financing necessary.

(2)   “Why do I Need Bridge Financing at All? Can’t you Just Wait for the Money from my Sale?”

As the lawyer for the purchaser, I need to make a number of promises to the lawyer of the vendor. By using the vendor’s documents, I am promising them that I will have any non mortgage related funds available to me on the possession day to forward to their office.  I NEED to be able to pay that money, or I am offside that promise.

These promises are called ‘trust conditions’. Trust conditions are described by the Law Society of Saskatchewan here:  http://www.lawsociety.sk.ca/for-the-public/do-i-have-a-complaint/common-concerns/breach-of-trust-conditions.aspx

It is a short article that describes the importance of trust conditions and undertakings for our profession.  Basically, enforceable promises between lawyers that cause significant professional grief and liability if broken.
Lawyers have created a standard set of trust conditions that we use to close most real estate transactions.  Each firm has some minor modifications to the standard format, but most are fairly consistent.
There are lots of reasons that sale transactions do not close on time or that the purchase price be delivered to our office unconditionally.  Accordingly, there are a number of reasons that I cannot be certain that I will have your sale money on your purchase possession date for use on your purchase.  In fact, the transaction could be complete several days after possession, or longer.  You receive the benefit of some interest if the funds are paid late, but until that money is in my office unconditionally, I am not going to rely on its use. 

(3)  “Why Can’t You Just Promise to Pay the other lawyer with the Money that you ‘will’ Receive from the Sale?”

Here is a bit of a shocker, to some.

The money on your sale is not guaranteed.

You read that right.  Even though you have transferred title over to the purchaser, there is no guarantee that you will get paid. 
How might the deal go wrong?  Well, aside from the exceptionally unusual outcome of lawyer fraud on the transaction (which would likely be covered by our insurer), the real risk is that a lender will not fund a mortgage on the transaction.  Even though the purchaser has signed all documents, jumped through all the hoops of financing, there is a possibility that the lender will decide they will not advance the money. It’s pretty rare, but it does happen.
There are ways to deal with those issues in the rare occasion that they arise, but the point here is that as a lawyer, I can’t proceed with your purchase without having your non-financed purchase funds being available to me.  It would potentially leave me in violation of the standard trust conditions.  Also, if a number of these deals were all linked together this way, it could cause multiple deals to fail all together, instead of just one. 

(4)  “Huh.  Makes Sense to Me.  Thanks for the Help!”

No problem.  Just remember – we may need bridge financing if your purchase and sale close on the same day, or even sometimes even if the sale closes just before your purchase.   Talk to your lawyer about the need for bridge funds if the sale and purchase close date are close to one another, and the risks of not have bridge financing with a tight possession date.

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