Are you considering a bridging loan but worried about your credit history? You’re not alone. Many people wonder, “Can you get a bridging loan with bad credit?”
The short answer is yes, it’s possible. But there’s more to the story.
Bridging loans are short-term financial solutions designed to cover a temporary gap in funding for property transactions or business ventures. Unlike traditional mortgages, bridging loans work on different principles, which can be good news for those with less-than-perfect credit.
In this article, we’ll explore how bridging loans work, how lenders view bad credit, and what you can do to improve your chances of approval.
Understanding Bad Credit in the Context of Bridging Loans
Before we address the main question, it’s essential to understand what ‘bad credit’ means in the world of bridging finance.
Generally, bad credit refers to a poor credit history, which may include:
- late payments
- defaults
- overuse of credit
- County Court Judgments (CCJs)
or even more serious issues like bankruptcy.
Fortunately, bridging lenders view credit issues differently compared to traditional mortgage providers.
While a high street bank might immediately reject an application based on a low credit score, bridging lenders can take a more nuanced approach.
They understand that credit problems can arise for various reasons and may be temporary setbacks rather than long-term financial instability.
Bridging lenders consider different types of credit issues. Recent problems, such as missed payments in the last few months, might raise more red flags than older, resolved issues.
Similarly, a pattern of financial difficulties may be viewed more negatively than a one-off event with a reasonable explanation.
Can You Get a Bridging Loan with Bad Credit?
So, can you get a bridging loan with bad credit?
The short answer is yes, it is possible.
However, the process may be more challenging, and the terms may differ from those offered to borrowers with excellent credit.
Several factors make this possible.
Firstly, bridging lenders focus primarily on the value of the property being used as security and the borrower’s exit strategy, rather than solely on credit history. This means that if you have a valuable property and a solid plan for repaying the loan, you may still be eligible despite credit issues.
Secondly, the short-term nature of bridging loans – typically lasting between 3 and 36 months – means lenders are often more willing to take on borrowers with less-than-perfect credit histories. The brief duration reduces the lender’s long-term risk exposure.
However, it’s important to be aware of potential challenges.
You may face higher interest rates, as lenders might increase rates to offset the perceived higher risk. Additionally, you might be required to provide a larger deposit or additional security. Some lenders may also impose stricter terms or require more comprehensive documentation.
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What Bridging Lenders Look for
When assessing a bridging loan application, lenders consider several factors beyond your credit score.
Understanding these can help you present a stronger application:
Property valuation and location play an important role.
Lenders will conduct a valuation of the property you’re offering as security. They’ll consider its current market value, location, and potential for appreciation or development. A property in a desirable area with good potential can significantly strengthen your application.
The loan-to-value (LTV) ratio is another key factor.
This is the amount you’re borrowing in relation to the property’s value. Most bridging lenders offer up to 75% LTV, with some going as high as 80%. If you have bad credit, you might be offered a lower LTV, requiring you to put in a larger cash deposit.
Related reading: Do You Need a Deposit for a Bridging Loan?
Your exit strategy is perhaps the most critical element of your application.
This is your plan for repaying the loan at the end of the term. Common exit strategies include selling the property, refinancing to a long-term mortgage, or using funds from another source.
Lenders will scrutinise your exit strategy closely, especially if you have credit issues. A clear, realistic, and well-documented exit plan can significantly improve your chances of approval.
The purpose of the loan doesn’t always matter but lenders will want to understand your intentions and how they align with your exit strategy.
For some types of bridging loans, particularly those for property development, your experience might be considered. If you have a track record of successful property projects, this could work in your favour, potentially offsetting concerns about your credit history.
Read more: Bridging loan exit strategies
The Application Process
The application process for a bridging loan with bad credit follows a similar path to standard bridging loans, but with potentially more scrutiny.
Here’s what you can expect:
The process typically begins with an initial assessment.
You’ll provide basic information about your circumstances, the property, and your loan requirements. Based on this, the lender may offer an Agreement in Principle (AIP). This is not a guarantee of the loan, but it indicates the lender’s willingness to consider your application.
If you decide to proceed, you’ll need to complete a full application. This involves providing comprehensive documentation, which may include:
- Proof of ID and address
- Details of your income and outgoings
- Information about the property you’re offering as security
- Your exit strategy, with supporting evidence
Lenders won’t automatically carry out a credit check. Whether this is needed depends on the overall merits of your application and the exit plan.
The next step is the property valuation. The lender will arrange for a valuer to assess the property. This valuation is crucial, as it informs the lender’s decision on the loan amount and terms.
Finally, there’s the legal work. The lender’s solicitors will conduct necessary searches and checks. Your own solicitor will review the loan offer and advise you. Once all parties are satisfied, the loan can complete, and funds can be released.
Throughout this process, clear communication is key. Be upfront about your credit issues and prepared to explain them. Many lenders appreciate honesty and will work with you if they understand your situation.
Costs and Terms for Bad Credit Bridging Loans
When considering a bridging loan with bad credit the potential costs and terms can differ significantly from standard bridging loans.
Interest rates for bridging loans are higher than traditional mortgages, and this difference may be more pronounced for borrowers with bad credit. Rates are usually quoted monthly and can range from 0.44% to 1.5% per month or more.
For bad credit applications, you’re likely to see rates at the higher end of this spectrum.
In addition to interest, you’ll need to consider various fees. These typically include:
- Arrangement fees: Usually 1-2% of the loan amount
- Valuation fees: To cover the cost of property valuation
- Legal fees: Both for your solicitor and the lender’s
- Potential exit fees: Some lenders charge a fee when you repay the loan
Loan terms for bridging finance typically range from 3 to 36 months. With bad credit, you might find lenders prefer shorter terms, reducing their risk exposure. It’s important to ensure the term aligns with your exit strategy.
Improving Your Chances of Approval
While bad credit can make obtaining a bridging loan more challenging, there are several steps you can take to improve your chances of approval:
Strengthening your exit strategy is paramount.
This is your plan for repaying the loan, and it’s arguably the most critical factor for lenders, especially when dealing with bad credit applications. Ensure your exit strategy is clear, realistic, and well-documented. If you’re planning to sell the property, provide evidence of its marketability.
If you’re intending to refinance, show that you’ve researched suitable mortgage products and already secured an agreement in principle.
Offering additional security can significantly boost your application.
This could be in the form of other property assets or high-value items. Some lenders may offer up to 100% LTV loans if you can provide sufficient additional security. In these cases the loan would be secured across two or more properties.
Applying with someone else
Taking out a joint bridging loan with someone else could improve your application. This is particularly true if your credit history is less than perfect. I won’t always mean that you can borrow more money but it could help to secure better terms.
Working with a specialist broker can be invaluable when applying for a bridging loan with bad credit.
These professionals have in-depth knowledge of the market and relationships with a wide range of lenders, including those who specialise in bad credit cases. They can help match you with the most suitable lenders and assist in presenting your application in the best possible light.
While certain types of bad credit can complicate the process of obtaining a bridging loan, it doesn’t make it impossible.
Bridging lenders will take a more holistic view of applications, focusing on factors such as property value, exit strategy, and the specific circumstances surrounding credit issues.
While this guide provides a comprehensive overview, every financial situation is unique. It’s always advisable to seek professional advice before committing to any financial product, especially one as significant as a bridging loan.
explore Bad Credit Bridging LoansNeed some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
